[Federal Register: December 3, 2002 (Volume 67, Number 232)]
[Rules and Regulations]
[Page 71821-71826]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr03de02-14]
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DEPARTMENT OF THE TREASURY
Internal Revenue Service
26 CFR Part 1
[TD 9021]
RIN 1545-AX68
Loans From a Qualified Employer Plan to Plan Participants or
Beneficiaries
AGENCY: Internal Revenue Service (IRS), Treasury.
ACTION: Final regulations.
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SUMMARY: This document contains final regulations relating to loans
made from a qualified employer plan to plan participants or
beneficiaries. These final regulations affect administrators of,
participants in, and beneficiaries of qualified employer plans that
permit
[[Page 71822]]
participants or beneficiaries to receive loans from plans, including
loans from section 403(b) contracts and other contracts issued under
qualified employer plans.
DATES: Effective Date: These regulations are effective December 3,
2002.
Applicability Date: These regulations apply to assignments,
pledges, and loans made on or after January 1, 2004.
FOR FURTHER INFORMATION CONTACT: Vernon S. Carter, (202) 622-6060 (not
a toll-free number).
SUPPLEMENTARY INFORMATION:
Background
This document contains amendments to the Income Tax Regulations (26
CFR part 1) under section 72 of the Internal Revenue Code of 1986
(Code). Section 72(p) was added by section 236 of the Tax Equity and
Fiscal Responsibility Act of 1982 (96 Stat. 324), and amended by the
Technical Corrections Act of 1982 (96 Stat. 2365), the Deficit
Reduction Act of 1984 (98 Stat. 494), the Tax Reform Act of 1986 (100
Stat. 2085), and the Technical and Miscellaneous Revenue Act of 1988
(102 Stat. 3342).
On July 31, 2000, final regulations were published in the Federal
Register in TD 8894 (65 FR 46588) with respect to issues arising under
section 72(p)(2). On the same date, a notice of proposed rulemaking
(REG-116495-99) was published in the Federal Register (65 FR 46677)
with respect to issues arising under section 72(p)(2) that were not
addressed in the 2000 final regulations. The proposed regulations
addressed the suspension of loan repayments during a leave of absence
for military service in accordance with section 414(u)(4), the effect
of a new loan following a deemed distribution of a prior loan, and the
effect of refinancings and multiple loans. The preamble to the proposed
regulations also requested comments on the application of the
Electronic Signature in Global and National Commerce Act (114 Stat.
464) (ESIGN), which had been enacted shortly before publication of the
proposed regulations. Following publication of the proposed
regulations, comments were received and a public hearing was held on
January 17, 2001. After consideration of the comments received the
proposed regulations are adopted as revised by this Treasury decision.
Explanation of Provisions
Section 72(p)(1)(A) provides that a loan from a qualified employer
plan (including a contract purchased under a qualified employer plan)
to a participant or beneficiary is treated as received as a
distribution from the plan for purposes of section 72 (a deemed
distribution). Section 72(p)(1)(B) provides that an assignment or
pledge of (or an agreement to assign or pledge) any portion of a
participant's or beneficiary's interest in a qualified employer plan is
treated as a loan from the plan.
Section 72(p)(2) provides that section 72(p)(1) does not apply to
the extent certain conditions are satisfied. Specifically, under
section 72(p)(2), a loan from a qualified employer plan to a
participant or beneficiary is not treated as a distribution from the
plan if the loan satisfies requirements relating to the term of the
loan, the repayment schedule, and the amount loaned. For example,
except in the case of certain home loans, the exception in section
72(p)(2) only applies to a loan that by its terms is to be repaid over
not more than five years in substantially level installments. Such a
loan is not a deemed distribution to the extent it does not exceed the
lesser of (i) an amount equal to $50,000, reduced to the extent that
the participant's or beneficiary's highest balance for plan loans
outstanding during the preceding 12 months exceeds the current balance
for plan loans, or (ii) 50 percent of the participant's or
beneficiary's nonforfeitable benefit. Under section 72(p)(2)(D), these
limitations apply by treating the loans from all plans of the
employer's controlled group as one loan.
For purposes of section 72, a qualified employer plan includes a
plan that qualifies under section 401 (relating to qualified trusts),
403(a) (relating to qualified annuities) or 403(b) (relating to tax
sheltered annuities), as well as a plan (whether or not qualified)
maintained by the United States, a State or a political subdivision
thereof, or an agency or instrumentality thereof. A qualified employer
plan also includes a plan which was (or was determined to be) a
qualified employer plan or a government plan.
Summary of Comments Received, Changes Made, and Summary of the Final
Regulations
These final regulations retain the general structure and much of
the substance of the proposed regulations, including a variety of
examples illustrating the provisions. Some changes have been made in
connection with specific recommendations for modifications and
clarifications. The comments received in response to the proposed
regulations are generally summarized below.
A. Loan Repayment Suspension During Leave of Absence for Military
Service in Accordance with Section 414(u)(4)
The proposed regulations stated that, under section 414(u)(4), a
plan that permits suspension of loan repayment during a leave of
absence for military service (as defined in 38 U.S.C. chapter 43) will
not cause the loan to be deemed distributed, even if the leave exceeds
a year. The rule was conditioned on loan repayments resuming upon the
completion of the military service, the amount remaining due on the
loan being repaid in substantially level installments, and the loan
being fully repaid by the end of the original term of the loan plus the
period of the military service. One commentator was concerned that
because the requirement that interest accruing during military service
be paid within the extended term would result in larger loan payments
following military service than payments preceding military service,
the rule could work a hardship on some participants. The commentator
suggested that the regulations be modified to allow extension of the
loan term in these cases to the period necessary to repay the loan with
payments in the same amount as before the military service leave.
Another commentator requested that the same extension of loan
repayments be permitted for other bona fide leaves of absence.
Section 414(u)(4) accommodates military service personnel by
permitting postponement of loan repayments while performing military
service, but does not alter the accrual of interest or any conditions
in section 72(p)(2). Under the proposed regulations, upon resuming
repayment, a lender may permit a participant to choose to increase the
amount of the payments or to make payments at the previous rate with a
balloon payment due at the end of the required time. The IRS and
Treasury believe that the amendments suggested by these comments would
not satisfy the conditions in section 72(p)(2) that are unaffected by
section 414(u)(4). Therefore, the final regulations adopt the
regulation as proposed. However, an example in the final regulations
has been modified to reflect the application of a maximum 6 percent
interest rate during the military leave in accordance with the
Soldiers' and Sailors' Civil Relief Act Amendments of 1942. A
modification has also been made to clarify that loan repayments can be
revised at the end of a military leave to extend the repayment schedule
in the event the loan originally had a term of
[[Page 71823]]
fewer than five years, as discussed below at the end of section C.
B. May Another Loan Be Extended After a Deemed Distribution
The proposed regulations provided that if a loan is deemed
distributed to a participant or beneficiary and has not been repaid,
then, unless certain conditions are satisfied, any payment made to the
participant or beneficiary thereafter will not be treated as a loan for
purposes of section 72(p)(2). Specifically, the proposed regulations
provided that to avoid this result, the plan must enter into an
agreement under which either repayments are made by payroll withholding
or adequate security for the additional loan (in addition to the
participant's accrued benefit) is obtained. Some commentators stated
that because individuals often hold section 403(b) annuity contracts
with more than one issuer, it may be difficult for an issuer to
determine whether an individual has defaulted on a plan loan with
another issuer. A concern was expressed that if upon a deemed
distribution a form 1099-R, Distributions From Pensions, Annuities,
Retirement or Profit Sharing Plans, IRAs, Insurance Contracts, etc., is
not issued reflecting taxable income, a subsequent loan to a defaulting
participant could subject the loan issuer to penalties.
However, in order to satisfy the limitations on the maximum amount
that may be loaned from plans of the employer imposed by section
72(p)(2)(A), the issuer of any loan under section 72(p)(2) must inquire
about other loans made from the plan or any other plan of the employer
before extending a loan. As part of this process, the issuer can
condition a new loan on a participant's disclosure of such prior loans
and, for this purpose, can rely on an employee's certification
concerning the status of prior loans, assuming the issuer has no reason
to doubt the employee's certification. Accordingly, the final
regulations adopt the provision as proposed.
C. May a Loan Be Refinanced
The proposed regulations provided that, while a loan may be
refinanced, the refinancing arrangement must satisfy the requirements
of section 72(p)(2)(B) and (C) that loans be repaid in substantially
level installments, not less often than quarterly and over a period not
in excess of five years (longer for certain home loans). Under the
proposed regulations, a refinancing is treated as a continuation of the
prior loan, plus a new loan to the extent of any increase in the loan
balance. Thus, while a refinancing loan can be repaid over a five-year
period from the date of the refinancing to the extent the refinancing
loan exceeds the prior loan amount, the prior outstanding loan must
continue to be repaid in substantially level installments over a period
not longer than the original term remaining on the prior loan in order
for the refinancing not to result in a deemed distribution. A
refinancing can also satisfy the repayment requirements of section
72(p)(2)(B) and (C) if the refinanced loan is repaid within the
original term remaining on the prior loan. If any portion of the
refinancing loan has a later repayment date than the original term
remaining on the prior loan, then both the prior loan and the
refinancing loan are treated as outstanding at the time of the
refinancing for purposes of the limitations on the maximum amount that
may be loaned from plans of the employer under section 72(p)(2) (which
is generally the lesser of a $50,000 amount described above or 50
percent of the employee's nonforfeitable benefit). These standards were
illustrated in examples.
Commentators requested that the regulations be modified so that the
rules for refinancings accommodate a prior loan with a term of less
than five years that is refinanced to a date that is five years from
the date of the prior loan.
The final regulations generally adopt the provision on loan
refinancings as proposed. However, the refinancing rules have been
modified to conform with the recommendation made by commentators on the
extension of a prior loan with an original term of less than five years
to a term of five years from the date of the prior loan. A similar
modification has also been made for repayments made following a
military leave.
D. Are Multiple Loans Permitted
Section 72(p)(2) does not prohibit a participant from borrowing
from a plan more than once a year. However, in order to address the
risk that additional loans could be taken out in order to avoid
repayment of prior loans, the proposed regulations provided that a
deemed distribution occurs if a participant obtains more than two loans
a year.
Several commentators stated that obtaining loans simply to repay
previous loans is an abuse that should not be permitted, and
commentators and others also provided information indicating that the
vast majority of defined contribution plans already include limitations
under which a participant is not permitted to have more than two loans
outstanding at any time. However, commentators generally requested the
flexibility of being allowed to make more than two loans per year to a
participant and provided various examples of situations (such as a
parent with several children in college) in which a participant might
have a legitimate need for multiple borrowings during a year. They also
noted that there is no direct statutory foundation for limiting the
number of loans under section 72(p) and that the special 12-month rule
with respect to the calculation of the $50,000 limitation under section
72(p)(2)(A)(i) inherently limits the number of loans that can be made
for larger borrowings. In recognition of these comments, the final
regulations do not include any limitation on the number of loans that
can be made under section 72(p)(2). Treasury and the IRS recognize that
the absence of any limitation on the number of loans that may be made
to a participant will allow certain practices that could not otherwise
occur without generating taxable income through a deemed distribution
under section 72(p). For example, as pointed out by certain
commentators, the use of a participant's account balance under a
qualified employer plan to secure a credit card is a practice that
would not be permissible if the regulations were to limit the number of
loans that could be made to a participant from a plan. Thus, Treasury
and the IRS recognize that, because the final regulations do not
include any limitation on the number of loans that can be made, there
will be no section 72(p) barrier to credit card loans that otherwise
meet the requirements of that section.
E. Application of ESIGN
The 2000 final regulations require that the terms of a plan loan be
set forth in an enforceable agreement and provide that the agreement
may be set forth in an electronic medium that satisfies standards that
are based on the standards for an electronic consent to a distribution
contained in Sec. 1.411(a)-11(f)(2). As noted in the preamble to the
proposed regulations under Sec. 1.417(a)(3)-1 published in the Federal
Register on October 7, 2002 (67 FR 62417) (relating to disclosure of
relative values of optional forms of benefit), the IRS and the Treasury
Department are considering the extent to which notices under the
various Code requirements relating to qualified retirement plans can be
provided electronically, taking into account the effect of ESIGN. As
further noted in that preamble, the IRS and the Treasury Department
anticipate issuing proposed regulations regarding
[[Page 71824]]
these issues, and invite comments on these issues. The requirements
applicable to electronic plan loan agreements may be considered in
connection with those upcoming proposed regulations as well.\1\
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\1\ The staff of the Board of Governors of the Federal Reserve
System (Board) has advised the IRS that a plan loan that satisfies
section 72(p)(2) and these regulations would constitute an extension
of credit under 12 CFR 226.2(a)(14) of regulation Z, implementing
the Truth in Lending Act (TILA). Thus, unless the plan or the loan
is otherwise excepted from the application of regulation Z (for
example, the plan could be exempt because the plan has not made
enough loans to be considered a creditor under regulation Z, or a
particular loan could be exempt because it exceeds TILA's limit of
$25,000 for loans not secured by real property or a dwelling), a
plan loan that satisfies the requirements of Q&A-3(b) of Sec.
1.72(p)-1 would be subject to the disclosure and other requirements
of regulation Z. The staff of the Board has further advised the IRS
and Treasury that, pending the Board's adoption of final rules
regarding electronic disclosures, creditors may provide electronic
disclosures required by regulation Z if the consumer's consent is
obtained as required under ESIGN. See 66 FR 17322 (March 30, 2001,
relating to reg. M, Consumer Leasing Act); 66 FR 17329 (March 30,
2001, relating to reg. Z, TILA); 66 FR 17779 (April 4, 2001,
relating to reg. B, Equal Credit Opportunity Act); 66 FR 17786
(April 4, 2001, relating to reg. E, Electronic Fund Transfer Act);
and 66 FR 17795 (April 4, 2001, relating to reg. DD, Truth in
Savings Act).
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F. May Section 457(b) Governmental Plans Have Plan Loans
Commentators requested that the regulations be modified to clarify
that eligible governmental plans under section 457(b) are permitted to
offer loans to employees in a manner consistent with section 72(p).
Proposed regulations under section 457 (REG-105885-99) that were
published in the Federal Register on May 8, 2002 (67 FR 30826), clarify
the conditions under which loans can be made to participants in such
plans (at proposed Sec. 1.457-6(f)) and that section 72(p) applies to
any such loan (at proposed Sec. 1.457-7(b)(3)).
G. Regulation Effective Date
The proposed regulations would have been effective on the first
January 1 that is at least 6 months after they are published as final
regulations. These final regulations apply to assignments, pledges, and
loans made on or after January 1, 2004, but do not apply to loans made
under an insurance contract that is in effect on December 31, 2003, if
the insurance carrier is required to offer loans to contractholders
that are not secured (other than by the participant's or beneficiary's
benefit under the contract).
Special Analyses
It has been determined that this Treasury decision is not a
significant regulatory action as defined in Executive Order 12866.
Therefore, a regulatory assessment is not required. It has also been
determined that section 553(b) of the Administrative Procedure Act (5
U.S.C. chapter 5) does not apply to these regulations, and, because the
regulations do not impose a collection of information on small
entities, the Regulatory Flexibility Act (5 U.S.C. chapter 6) does not
apply. Pursuant to section 7805(f) of the Code, the notice of proposed
rulemaking preceding these regulations was submitted to the Chief
Counsel for Advocacy of the Small Business Administration for comment
on its impact on small business.
Drafting Information
The principal author of these regulations is Vernon S. Carter,
Office of Division Counsel/Associate Chief Counsel (Tax Exempt and
Government Entities). However, other personnel from the IRS and
Treasury Department participated in their development.
List of Subjects in 26 CFR Part 1
Income taxes, Reporting and recordkeeping requirements.
Adoption of Amendments to the Regulations
Accordingly, 26 CFR part 1 is amended as follows:
PART 1--INCOME TAXES
Paragraph 1. The authority citation for part 1 continues to read,
in part, as follows:
Authority: 26 U.S.C. 7805 * * *
Par. 2. Section 1.72(p)-1 is amended as follows:
1. A-9, Q&A-19, and Q-20 are revised, and A-20 is added.
2. A-22 is amended by adding paragraph (d).
The revisions and additions read as follows:
Sec. 1.72(p)-1 Loans treated as distributions.
* * * * *
A-9: (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.
(b) Military service. In accordance with section 414(u)(4), if a
plan suspends the obligation to repay a loan made to an employee from
the plan for any part of a period during which the employee is
performing service in the uniformed services (as defined in 38 U.S.C.
chapter 43), whether or not qualified military service, such suspension
shall not be taken into account for purposes of section 72(p) or this
section. Thus, if a plan suspends loan repayments for any part of a
period during which the employee is performing military service
described in the preceding sentence, such suspension shall not cause
the loan to be deemed distributed even if the suspension exceeds one
year and even if the term of the loan is extended. However, the loan
will not satisfy the repayment term requirement of section 72(p)(2)(B)
and the level amortization requirement of section 72(p)(2)(C) unless
loan repayments resume upon the completion of such period of military
service and the loan is repaid thereafter by amortization in
substantially level installments over a period that ends not later than
the latest permissible term of the loan.
(c) Latest permissible term of a loan. For purposes of this Q&A-9,
the latest permissible term of a loan is the latest date permitted
under section 72(p)(2)(B) (i.e., five years from the date of the loan,
assuming that the replacement loan does not qualify for the exception
at section 72(p)(2)(B)(ii) for principal residence plan loans) plus any
additional period of suspension permitted under paragraph (b) of this
Q&A-9.
(d) Examples. The following examples illustrate the rules of this
Q&A-9 and are based upon the assumptions described in the introductory
text of this section:
Example 1. (i) On July 1, 2003, a participant with a
nonforfeitable account balance of $80,000 borrows $40,000 to be
repaid in level monthly installments of $825 each over 5 years. The
loan is not a principal residence plan loan. The participant makes 9
monthly payments and commences an unpaid leave of absence that lasts
for 12 months. The participant was not performing military service
during this period. Thereafter, the participant resumes active
employment and resumes making repayments on the loan until the loan
is repaid. The amount of each monthly installment is increased to
$1,130 in order to repay the loan by June 30, 2008.
(ii) Because the loan satisfies the requirements of section
72(p)(2), the
[[Page 71825]]
participant does not have a deemed distribution. Alternatively,
section 72(p)(2) would be satisfied if the participant continued the
monthly installments of $825 after resuming active employment and on
June 30, 2008 repaid the full balance remaining due.
Example 2. (i) The facts are the same as in Example 1, except
the participant was on leave of absence performing service in the
uniformed services (as defined in chapter 43 of title 38, United
States Code) for two years and the rate of interest charged during
this period of military service is reduced to 6 percent compounded
annually under 50 App. section 526 (relating to the Soldiers' and
Sailors' Civil Relief Act Amendments of 1942). After the military
service ends on April 2, 2006, the participant resumes active
employment on April 19, 2006, continues the monthly installments of
$825 thereafter, and on June 30, 2010, repays the full balance
remaining due ($6,487).
(ii) Because the loan satisfies the requirements of section
72(p)(2) and paragraph (b) of this Q&A-9, the participant does not
have a deemed distribution. Alternatively, section 72(p)(2) would
also be satisfied if the amount of each monthly installment after
April 19, 2006, is increased to $930 in order to repay the loan by
June 30, 2010 (without any balance remaining due then).
* * * * *
Q-19: If there is a deemed distribution under section 72(p), is the
interest that accrues thereafter on the amount of the deemed
distribution an indirect loan for income tax purposes and what effect
does the deemed distribution have on subsequent loans?
A-19: (a) General rule. Except as provided in paragraph (b) of this
Q&A-19, a deemed distribution of a loan is treated as a distribution
for purposes of section 72. Therefore, a loan that is deemed to be
distributed under section 72(p) ceases to be an outstanding loan for
purposes of section 72, and the interest that accrues thereafter under
the plan on the amount deemed distributed is disregarded for purposes
of applying section 72 to the participant or the beneficiary. Even
though interest continues to accrue on the outstanding loan (and is
taken into account for purposes of determining the tax treatment of any
subsequent loan in accordance with paragraph (b) of this Q&A-19), this
additional interest is not treated as an additional loan (and thus,
does not result in an additional deemed distribution) for purposes of
section 72(p). However, a loan that is deemed distributed under section
72(p) is not considered distributed for all purposes of the Internal
Revenue Code. See Q&A-16 of this section.
(b) Effect on subsequent loans--(1) Application of section
72(p)(2)(A). A loan that is deemed distributed under section 72(p)
(including interest accruing thereafter) and that has not been repaid
(such as by a plan loan offset) is considered outstanding for purposes
of applying section 72(p)(2)(A) to determine the maximum amount of any
subsequent loan to the participant or beneficiary.
(2) Additional security for subsequent loans. If a loan is deemed
distributed to a participant or beneficiary under section 72(p) and has
not been repaid (such as by a plan loan offset), then no payment made
thereafter to the participant or beneficiary is treated as a loan for
purposes of section 72(p)(2) unless the loan otherwise satisfies
section 72(p)(2) and this section and either of the following
conditions is satisfied:
(i) There is an arrangement among the plan, the participant or
beneficiary, and the employer, enforceable under applicable law, under
which repayments will be made by payroll withholding. For this purpose,
an arrangement will not fail to be enforceable merely because a party
has the right to revoke the arrangement prospectively.
(ii) The plan receives adequate security from the participant or
beneficiary that is in addition to the participant's or beneficiary's
accrued benefit under the plan.
(3) Condition no longer satisfied. If, following a deemed
distribution that has not been repaid, a payment is made to a
participant or beneficiary that satisfies the conditions in paragraph
(b)(2) of this Q&A-19 for treatment as a plan loan and, subsequently,
before repayment of the second loan, the conditions in paragraph (b)(2)
of this Q&A-19 are no longer satisfied with respect to the second loan
(for example, if the loan recipient revokes consent to payroll
withholding), the amount then outstanding on the second loan is treated
as a deemed distribution under section 72(p).
Q-20: May a participant refinance an outstanding loan or have more
than one loan outstanding from a plan?
A-20: (a) Refinancings and multiple loans--(1) General rule. A
participant who has an outstanding loan that satisfies section 72(p)(2)
and this section may refinance that loan or borrow additional amounts
if, under the facts and circumstances, the loans collectively satisfy
the amount limitations of section 72(p)(2)(A) and the prior loan and
the additional loan each satisfy the requirements of section
72(p)(2)(B) and (C) and this section. For this purpose, a refinancing
includes any situation in which one loan replaces another loan.
(2) Loans that repay a prior loan and have a later repayment date.
For purposes of section 72(p)(2) and this section (including paragraph
(a)(3) of this Q&A-20 and the amount limitations of section
72(p)(2)(A)), if a loan that satisfies section 72(p)(2) is replaced by
a loan (a replacement loan) and the term of the replacement loan ends
after the latest permissible term of the loan it replaces (the replaced
loan), then the replacement loan and the replaced loan are both treated
as outstanding on the date of the transaction. For purposes of the
preceding sentence, the latest permissible term of the replaced loan is
the latest date permitted under section 72(p)(2)(C) (i.e., five years
from the original date of the replaced loan, assuming that the replaced
loan does not qualify for the exception at section 72(p)(2)(B)(ii) for
principal residence plan loans and that no additional period of
suspension applied to the replaced loan under Q&A-9 (b) of this
section). Thus, for example, if the term of the replacement loan ends
after the latest permissible term of the replaced loan and the sum of
the amount of the replacement loan plus the outstanding balance of all
other loans on the date of the transaction, including the replaced
loan, fails to satisfy the amount limitations of section 72(p)(2)(A),
then the replacement loan results in a deemed distribution. This
paragraph (a)(2) does not apply to a replacement loan if the terms of
the replacement loan would satisfy section 72(p)(2) and this section
determined as if the replacement loan consisted of two separate loans,
the replaced loan (amortized in substantially level payments over a
period ending not later than the last day of the latest permissible
term of the replaced loan) and, to the extent the amount of the
replacement loan exceeds the amount of the replaced loan, a new loan
that is also amortized in substantially level payments over a period
ending not later than the last day of the latest permissible term of
the replaced loan.
(b) Examples. The following examples illustrate the rules of this
Q&A-20 and are based on the assumptions described in the introductory
text of this section:
Example 1. (i) A participant with a vested account balance that
exceeds $100,000 borrows $40,000 from a plan on January 1, 2005, to
be repaid in 20 quarterly installments of $2,491 each. Thus, the
term of the loan ends on December 31, 2009. On January 1, 2006, when
the outstanding balance on the loan is $33,322, the loan is
refinanced and is replaced by a new $40,000 loan from the plan to be
repaid in 20 quarterly installments. Under the terms of the
refinanced loan, the loan is to be repaid in
[[Page 71826]]
level quarterly installments (of $2,491 each) over the next 20
quarters. Thus, the term of the new loan ends on December 31, 2010.
(ii) Under section 72(p)(2)(A), the amount of the new loan, when
added to the outstanding balance of all other loans from the plan,
must not exceed $50,000 reduced by the excess of the highest
outstanding balance of loans from the plan during the 1-year period
ending on December 31, 2005, over the outstanding balance of loans
from the plan on January 1, 2006, with such outstanding balance to
be determined immediately prior to the new $40,000 loan. Because the
term of the new loan ends later than the term of the loan it
replaces, under paragraph (a)(2) of this Q&A-20, both the new loan
and the loan it replaces must be taken into account for purposes of
applying section 72(p)(2), including the amount limitations in
section 72(p)(2)(A). The amount of the new loan is $40,000, the
outstanding balance on January 1, 2006, of the loan it replaces is
$33,322, and the highest outstanding balance of loans from the plan
during 2005 was $40,000. Accordingly, under section 72(p)(2)(A), the
sum of the new loan and the outstanding balance on January 1, 2006,
of the loan it replaces must not exceed $50,000 reduced by $6,678
(the excess of the $40,000 maximum outstanding loan balance during
2005 over the $33,322 outstanding balance on January 1, 2006,
determined immediately prior to the new loan) and, thus, must not
exceed $43,322. The sum of the new loan ($40,000) and the
outstanding balance on January 1, 2006, of the loan it replaces
($33,322) is $73,322. Since $73,322 exceeds the $43,322 limit under
section 72(p)(2)(A) by $30,000, there is a deemed distribution of
$30,000 on January 1, 2006.
(iii) However, no deemed distribution would occur if, under the
terms of the refinanced loan, the amount of the first 16
installments on the refinanced loan were equal to $2,907, which is
the sum of the $2,491 originally scheduled quarterly installment
payment amount under the first loan, plus $416 (which is the amount
required to repay, in level quarterly installments over 5 years
beginning on January 1, 2006, the excess of the refinanced loan over
the January 1, 2006, balance of the first loan ($40,000 minus
$33,322 equals $6,678)), and the amount of the 4 remaining
installments was equal to $416. The refinancing would not be subject
to paragraph (a)(2) of this Q&A-20 because the terms of the new loan
would satisfy section 72(p)(2) and this section (including the
substantially level amortization requirements of section 72(p)(2)(B)
and (C)) determined as if the new loan consisted of 2 loans, one of
which is in the amount of the first loan ($33,322) and is amortized
in substantially level payments over a period ending December 31,
2009 (the last day of the term of the first loan) and the other of
which is in the additional amount ($6,678) borrowed under the new
loan. Similarly, the transaction also would not result in a deemed
distribution (and would not be subject to paragraph (a)(2) of this
Q&A-20) if the terms of the refinanced loan provided for repayments
to be made in level quarterly installments (of $2,990 each) over the
next 16 quarters.
Example 2. (i) The facts are the same as in Example 1(i), except
that the applicable interest rate used by the plan when the loan is
refinanced is significantly lower due to a reduction in market rates
of interest and, under the terms of the refinanced loan, the amount
of the first 16 installments on the refinanced loan is equal to
$2,848 and the amount of the next 4 installments on the refinanced
loan is equal to $406. The $2,848 amount is the sum of $2,442 to
repay the first loan by December 31, 2009 (the term of the first
loan), plus $406 (which is the amount to repay, in level quarterly
installments over 5 years beginning on January 1, 2006, the $6,678
excess of the refinanced loan over the January 1, 2006, balance of
the first loan).
(ii) The transaction does not result in a deemed distribution
(and is not subject to paragraph (a)(2) of this Q&A-20) because the
terms of the new loan would satisfy section 72(p)(2) and this
section (including the substantially level amortization requirements
of section 72(p)(2)(B) and (C)) determined as if the new loan
consisted of 2 loans, one of which is in the amount of the first
loan ($33,322) and is amortized in substantially level payments over
a period ending December 31, 2009 (the last day of the term of the
first loan), and the other of which is in the additional amount
($6,678) borrowed under the new loan. The transaction would also not
result in a deemed distribution (and not be subject to paragraph
(a)(2) of this Q&A-20) if the terms of the new loan provided for
repayments to be made in level quarterly installments (of $2,931
each) over the next 16 quarters.
* * * * *
A-22: * * *
(d) Effective date for Q&A-19(b)(2) and Q&A-20. Q&A-19(b)(2) and
Q&A-20 of this section apply to assignments, pledges, and loans made on
or after January 1, 2004.
Robert E. Wenzel,
Deputy Commissioner of Internal Revenue.
Approved: November 7, 2002.
Pamela F. Olson,
Assistant Secretary of the Treasury (Tax Policy).
[FR Doc. 02-29204 Filed 12-2-02; 8:45 am]
BILLING CODE 4830-01-P