IRS Issues Memorandum on Plan Loan Cure Periods

IRS says missed repayments can be addressed in the following quarter or that participants can refinance a loan, but that it will still be due on the original due date.

The Internal Revenue Service (IRS) has issued a memorandum on defined contribution (DC) plan loan cure periods for participants who have failed to make installment payments.

On a regular basis the IRS notes that loans, as long as they are not for the purchase of a primary home, can be repaid in five years and that payments are due at the end of the month for the repayment term of the loan.

But should a participant miss a payment, according to the memorandum, they can take care of that payment by the last day of the calendar quarter following the previous quarter in which the payment was due, the IRS says. They can also refinance a loan—but it will still be due on the original due date.

The IRS gave two scenarios in which a participant missed a payment. In the first instance, the participant made up for the lost payments and in the second instance, the participant refinanced the loan. In the first example, the participant missed their March 31, 2019, and April 30, 2019, payments but makes a payment on July 31, 2019, that is three times their normal payment—which means the participant has satisfied the conditions of his or her loan.

In the second example, the participant misses three payments in 2019, on October 31, November 30 and December 31—and decides to refinance the loan and replace it with a new loan on January 15, 2020. This new loan is still due within the original period, on December 31, 2022, the IRS says. “The participant’s missed installment payments do not violate the level amortization requirement,” the IRS says, “because the missed installment payments are cured within the applicable cure period by refinancing the loan.”

The IRS reminds plan sponsors that the statutory plan loan limit is the lesser of: $50,000, less any outstanding loan balance in the previous year, or the greater of half of the participant’s vested accrued benefit or $10,000.

The IRS’ memorandum about plan loans can be downloaded here.