How does the plan treat an outstanding plan loan?

If a participant fails to repay a loan according to its terms, it creates a taxable distribution. Plans may, but are not required, to adopt special loan provisions for participants on military leave to avoid this outcome. USERRA allows plans to suspend loan payments provided:

  • Loan repayments resume upon completion of the period of military service;
  • The interest is paid for the period of military service (either by increasing the payment or having a balloon payment at the end of the loan);
  • The repayment amount and frequency is no less than the original amortization; and
  • The loan is repaid in substantially level installments over a period that ends not later than the “latest permissible term,” defined as five years plus the time of qualified military service.

For example, Darla obtains a loan on January 1, 2016, with a final payment due December 1, 2020. She is on active duty during all of 2017 and returns January 1, 2018. She can begin repaying the loan in January 2018 with an extended amortization schedule ending December 1, 2021, (extending her repayment period by one year). She can either increase her installment payments to include accrued interest for 2017 or make a lump sum payment at the end of the loan period.