RPF M4 U3 Repayment Requirements and Consequences of Defaults Flashcards
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What happens if a participant fails to meet the repayment requirements of the loan?
The loan may default if payments are not made by the end of the cure period.
What happens if a participant terminates employment with the company and has an outstanding loan balance?
The outstanding loan balance becomes due and payable upon termination.
What is a Cure Period?
The period after a missed loan payment during which the participant can make up missed payments to avoid default.
What is a Deemed Distribution?
The portion of a loan that becomes taxable due to failure to meet loan requirements, accruing interest until repaid.
What is Default?
The status of a loan with missed payments that were not repaid by the end of the cure period.
What does Delinquent mean in terms of loans?
The status of a loan that has had a missed payment but is still within the cure period.
What is an Offset in loan terms?
The actual distribution of the unpaid loan receivable from the plan, treated as a distribution.
What are the repayment methods for loans?
Payments can be made via payroll deduction, debit ACH, or personal check.
How long can a loan be suspended for a non-military leave of absence?
A loan cannot be suspended for more than 12 months.
What happens to interest during a loan suspension for military leave?
Interest is capped at 6% for the duration of the military leave.
What choices do participants have at the end of a loan suspension?
Participants can refinance the loan to include accrued interest or make a balloon payment for all missed payments.
What is a Qualified Disaster in loan terms?
A federally declared disaster that allows an extension of the loan repayment period by up to 12 months without default.
When does a loan default occur?
A loan defaults due to missed payments or failure to pay off the loan by the maturity date.
What is the regulatory maximum cure period?
The last business day of the calendar quarter following the quarter in which the first missed payment occurred.
What happens when a loan defaults?
The defaulted loan becomes a taxable distribution and may be offset or treated as a deemed distribution.
What is a loan offset?
When the defaulted loan amount is treated as a distribution, allowing for a rollover to an IRA.
What is a deemed distribution?
An outstanding loan balance treated as a taxable distribution if the participant is not entitled to a withdrawal.
What happens if a participant passes away with an outstanding loan?
The loan becomes immediately due, and the estate has time to repay before it is treated as a default.
Can a participant who defaults on a loan take another loan in the future?
Yes, but they must follow the application process and cannot exceed the maximum number of outstanding loans allowed.
What is the IRS’s Employee Plans Compliance Resolution System (EPCRS)?
A system that provides methods to correct loan errors to minimize adverse consequences.
What must Marvin do regarding his outstanding loan balance after termination?
Marvin must pay back the outstanding balance before the end of the cure period or the date his benefit election is processed.
What must Derek do after missing loan payments?
Derek must make up the missed payments by the end of the cure period.
What happens if a participant fails to meet the repayment requirements of the loan?
As soon as the first payment is missed, the loan becomes delinquent. If the missed payments are not made up by the end of the cure period, the loan defaults. If the participant has a sufficient withdrawable balance to cover the outstanding loan amount, that balance is reduced (offset) by the amount of the loan. If the plan does not allow for withdrawals or the funds are not sufficient to cover the defaulted loan amount, the loan is a deemed distribution. Both outcomes have tax consequences.
What happens if a participant terminates employment with the company and has an outstanding loan balance?
Depending on the plan, the participant may be able to continue making payments through debit ACH or the use of loan coupons. If the plan does not allow participants to continue their periodic payments, the participant must pay off the loan balance by the earlier of the end of the cure period or the date the participant’s benefit election is processed.
