An inside income provider (IRS) Chief Counsel Advice memo issued to aid counsel in just one of the agency’s offices that are regional
The memo, dated August 30, offers two pictures sjust howing how missed installments can be constructed without penalty. One utilizes a later, bigger re payment while the other employs a replacement loan. Both circumstances happen inside the hypothetical plan’s stated loan remedy duration.
Two Examples Offered
Both examples derive from the reality that: (1) the 401(k) plan in question allows plan loans and permits for a remedy duration; and (2) that on January 1, 2018, the participant obtains an agenda loan that doesn’t go beyond the permitted restriction on such loans, just isn’t a mortgage, includes a legitimately enforceable contract, and it is repayable in equal installments at the conclusion of every month associated with contract, that is amortized over 5 years.
The plan’s cure period lets a participant make up a missed installment payment by the last day of the calendar quarter after the calendar quarter in which the installment was due in this case.
The amount of the loan will be treated as having been received by the participant as a distribution from the plan as background, the federal tax code’s Section 72(p), which governs plan loans, provides that if a participant receives (directly or indirectly) a loan from a qualified employer retirement plan. Then a deemed distribution of the loan that may be taxable occurs, the IRS memo said if a plan loan satisfies these requirements but payments are not made in accordance with the loan’s terms.
Here you will find the IRS Chief Counsel guidance memo’s two examples
Circumstances 1: Make-Up Installment Payment. The participant makes loan that is timely re re payments from January 31, 2018, through September 30, 2019. The participant misses the March 31, 2019, and April 30, 2019, installments. Then makes payments may 31, 2019, put on the missed March 31, 2019, re payment, and 30, 2019, which is applied to the missed April 30, 2019, payment june. On July 31, 2019, the participant makes a repayment corresponding to three installments—which is used to your missed might 31 and June 30 re payments for the 12 months, along with the needed July 31, 2019, installment payment.
Circumstances 2: Substitution Arrange Loan. The participant makes on-time payments from January 31, 2018, through September 30, 2019. She misses the 31, 2019, November 30, 2019, and December 31, 2019, installment payments october. On January 15, 2020, she refinances the mortgage and replaces it having a loan that is new into the outstanding stability associated with initial loan, such as the three missed payments. Beneath the regards to the replacement loan, it really is become paid back in degree installments that are monthly the conclusion of every month through the finish associated with the changed loan’s payment term, December 31, 2022.
The IRS memo stated that both in instances the individuals’ missed installments “do perhaps maybe perhaps not violate the amount amortization requirement under” code part 72(p) because both are cured in the relevant cure duration. “Accordingly, there is absolutely no distribution that is deemed of loan because of the missed installments. ”
Additionally figured both for circumstances provided, the remedy duration permitted in the master plan will not expand beyond the period established in Section 72(p), meaning the remedy duration will not rise above the final time of this calendar quarter following the calendar quarter where the missed installment re payment had been due.
If either of the actions to settle or change the payments is taken following the cure that is permitted ends, nevertheless, the whole outstanding stability associated with the loan becomes completely taxable as a considered circulation, perhaps not just the missed installment payments alone.
The remedy duration, if permitted, should always be within the written plan document.