A qualified retirement plan can provide for loans to be made to participants under the terms of the plan if the plan provisions comply with the requirements under IRC §72(p)(2). The loan must require repayment within five years, have payments made at least quarterly, and there must be a level amortization (that is, equal payments). If a participant fails to comply with the terms of the loan, the balance is deemed distributed to the participant.
Reg. §1.72(p)-1, Q&A 10 allows a plan to include a “grace period” to allow participants to correct missed payments. Under these provisions a missed payment must be corrected by the end of the calendar quarter after the calendar quarter in which the missed payment took place. While a plan does not have to allow for a grace period, most plans will provide for this since otherwise any sort of problem would trigger a deemed distribution to the beneficiary.
In Chief Counsel Memorandum 201736022 the IRS looks at two situations to determine if the grace period rules have been complied with.
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