An interior income provider (IRS) Chief Counsel Advice memo issued to aid counsel in another of the agency’s offices that are regional
The memo, dated August 30, provides two pictures sexactly howing how missed installments might be made without penalty. One makes use of a later on, bigger re payment in addition to other employs a replacement loan. Both circumstances happen inside the hypothetical plan’s stated loan remedy duration.
Two Examples Provided
Both examples are derived from the reality that: (1) the 401(k) plan at issue allows plan loans and permits for a remedy duration; and (2) that on January 1, 2018, the participant obtains an idea loan that will not meet or exceed the permitted limit on such loans, isn’t a mortgage loan, features a lawfully enforceable contract, and it is repayable in equal installments at the conclusion of every month associated with the contract, which will be amortized over 5 years.
In cases like this, the plan’s remedy duration allows a participant make up a missed installment repayment because of the final time associated with the calendar quarter following the calendar quarter where the installment had been due.
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 prompt loan installment re payments from January 31, 2018, through September 30, 2019. The participant misses the March 31, 2019, and 30, 2019, installments april. Then makes payments may 31, 2019, placed on the missed March 31, 2019, re 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 add up to three installments—which is applied to your missed May 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 installments from January 31, 2018, through September 30, 2019. She misses the October 31, 2019, November 30, 2019, and December 31, 2019, payments. On 
January 15, 2020, she refinances the mortgage and replaces it with a brand new loan equal into the outstanding stability for the original 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 replaced loan’s payment term, December 31, 2022.
No Breach
The IRS memo stated that both in instances the individuals’ missed installments “do perhaps maybe perhaps not break the amount amortization requirement under” code part 72(p) because both are cured inside the relevant remedy duration. “Accordingly, there’s no deemed circulation of this loan because of the missed installment payments. ”
It determined that for both circumstances provided, the remedy duration allowed in the plan will not expand beyond the period established in Section 72(p), meaning the remedy duration will not rise above the very last time associated with the calendar quarter following the calendar quarter when the missed installment re payment ended up being 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 of this loan becomes completely taxable being a considered circulation, maybe not just the missed installment payments alone.
The remedy duration, if permitted, must certanly be within the written plan document.