Participant loan repayments are generally made via payroll deductions, so what happens when the participant goes on a leave of absence with an outstanding loan? The individual circumstances of the leave will impact the treatment of the outstanding loan. The plan sponsor must determine whether the leave is due to military service and, if not, whether the participant will be receiving any compensation during the leave.

Military Service
Special provisions apply to outstanding loans for participants on military leave. The loan repayments are suspended until the completion of the military service. If the military service materially affects the participant's ability to repay a loan, the participant can request that the interest rate for the period of active duty be reduced to 6%. Upon the participant's return to employment, the loan payments may be increased over the remaining term of the loan or the term of the loan may be extended. The maximum extended term of the loan is five years plus the period of military service, unless the loan is for a primary residence. The amount of the adjusted loan payments may not be less that the original installment payment.

Leave of Absence
When participants go on non-military leave of absence, their loan payments may be suspended for a period not exceeding one year provided that the participant is not receiving compensation from the plan sponsor or is receiving an amount that is less than the required payment amount. Interest on the loan continues to accrue during this period. If the leave of absence extends beyond one year, the participant will need to make other arrangements to repay the loan or it will go into default as of the last day of the calendar quarter following the date the one year suspension period ended.

The participant's repayment options following a leave of absence are to either increase the payment amounts over the remaining term of the loan or to extend the term of the loan. Under no circumstances may the term of the loan be extended beyond the maximum term allowed by law, which is five years unless the loan is for a primary residence. The amount of the adjusted loan payments may not be less that the original installment payment.

Please inform American Pensions immediately if any participant with an outstanding loan goes on a leave of absence, including leave due to active military service, so we can ensure the suspension of payments is properly reflected in our records. Please also notify us when the participant returns from leave so we can accommodate the changes to the loan payment amounts and/or repayment schedule.