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5-year Loan Term

Practice Management

Editor's Note: This is the ninth installment in a series concerning correcting plan loan failures. 

Q. There are still large record keepers who start the 5-year loan term based on the scheduled 1st payment of the loan rather than the date of the loan origination.  We are a TPA and have many arguments with these record keepers who site loan rules from many, many years ago.  Are there any official sites that discuss the 5-year term beginning on the date of the loan origination we can provide the record keepers? 

A. I also have had discussions with recordkeepers regarding this issue. Generally, when I have asked them to provide a written indemnification to the employer if the IRS challenges their interpretation of the 5-year repayment rule, they decline; which demonstrates to me their position is not that strong.

The IRS’ 401(k) Plan Fix-It Guide states: 

  • “The loan terms should require the participant to make level amortized payments at least quarterly. 
  • Each payment should include an allocation of principal and interest. 
  • The loan must be repaid within five years unless the participant uses the loan to purchase his or her main home. The five-year repayment period is determined from date the loan was made.” 
  • I am not certain what “old” loan rules to which they are referring. I would love to know the citation. I know that some institutions cite some legislative history that states a reasonable delay in the start of the loan repayments will not violate the level amortization requirement, but that legislative history is not discussing the 5-year repayment rule.

Editor’s Note: This content is taken from “Loans: Correcting Taxation, Qualification and Fiduciary Failures,” an April 15, 2020 ASPPA Webinar presented by Stephen W. Forbes J.D., LL.M. of Forbes Retirement Plan Consulting. 

Opinions expressed are those of the author, and do not necessarily reflect the views of ASPPA or its members.