(b)lines Ask the Experts – Loan Defaults and Non-Military Leaves of Absence

“I read with great interest your Ask the Experts column discussing the effect of a military leave on a ‘cure period’ where a loan repayment was not made prior to the military leave, but a default has not yet taken place, because the cure period has not yet expired.

“Essentially, the cure period in that scenario was extended by the length of the military leave (provided the plan contained such a military leave provision) so that no loan payments were due even though the loan was not current when the leave commenced. Would the same extension apply for a non-military leave, or would a clock on the cure period keep ticking during a non-military leave of absence until a loan repayment was made?”



Stacey Bradford, Kimberly Boberg, David Levine and David Powell, with Groom Law Group, and Michael A. Webb, vice president, Retirement Plan Services, Cammack Retirement Group, answer:


This is an excellent question, as it highlights a key difference in loan repayments between military and non-military leaves of absence, as described in Treasury Regulation Section 1.72(p)-1. As we indicated in our prior column, Q&A 9(b), which addresses repayments during military leaves of absence, provides that the suspension period will not count against the participant for purposes of determining whether the participant failed to make a payment, or to correct a missed payment, on time. Thus, a loan that was NOT deemed distributed while an employee was in active employment with the employer (including on an approved non-military leave of absence) CANNOT be deemed distributed when the employee goes on military leave, since, as the Q&A clearly indicates, there is not an obligation to repay a loan at all during military service.


However, the military leave language of Q&A 9(b) is quite different than the Q&A language addressing non-military leaves of absence, as follows:

“(a) Leave of absence. The level amortization requirement of section 72(p)(2)(C) does not apply for a period, not longer than one year (or such longer period as may apply under section 414(u) and paragraph (b) of this Q&A-9), that a participant is on a bona fide leave of absence, either without pay from the employer or at a rate of pay (after applicable employment tax withholdings) that is less than the amount of the installment payments required under the terms of the loan. However, the loan (including interest that accrues during the leave of absence) must be repaid by the latest permissible term of the loan and the amount of the installments due after the leave ends must not be less than the amount required under the terms of the original loan.”


Unlike the military leave section, this section does NOT state that the suspension of payments under the leave is disregarded for purposes of 72(p) (meaning that there is not an obligation to repay a loan at all during the leave period); it merely states that the level amortization requirement for loan repayments does not apply during the leave. Thus, during such a leave of absence the “cure period” for the prior missed loan repayment still applies, and if the late loan repayment is not made during the cure period, the loan will be deemed distributed in accordance with Q&A-10. As stated in Q&A-10, the cure period cannot continue beyond the last day of the calendar quarter following the calendar quarter in which the required installment payment was due. This cure period is rendered moot in the event of a military leave of absence (if the plan provides for such a leave) but is in full effect in the event of a non-military leave, and the participant must make up the missed loan payment before the expiration of the cure period or default on the loan. 



NOTE: This feature is to provide general information only, does not constitute legal advice, and cannot be used or substituted for legal or tax advice.


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