3834. How do refinancing transactions work?polearyrcline202014-08-17T19:45:00Z2014-08-17T19:45:00Z23481987The National Underwriter Company1642331143834. How do refinancing transactions work in the context of qualified plan loans?A refinancing transaction is any transaction in which one loan replaces another. For example, a refinancing may exist if the outstanding loan amount is increased or if the interest rate or the repayment term of the loan is renegotiated.Treas. Reg. §1.72(p)-1, A-20(a).If the term of a replacement loan ends later than the term of the loan it replaces, then both loans are treated as outstanding on the date of the refinancing transaction. This generally means that the loans must collectively satisfy the requirements of IRC Section 72(p).Treas. Reg. §1.72(p)-1, A-20(a)(2). There is an exception where the replacement loan would satisfy IRC Section 72(p)(2) if it were treated as two separate loans. Under this exception, the amount of the replaced loan, amortized over a period ending no later than the end of the original term of the replaced loan or five years, if later, is treated as one loan. The other loan is for an amount equal to the difference between the amount of the replacement loan and the outstanding balance of the replaced loan.Treas. Reg. §1.72(p)-1, A-20(a)(2).The IRS will not view the transaction as circumventing IRC Section 72(p) if a replacement loan effectively amortizes an amount equal to the replaced loan within the original term of the replaced loan or within five years, if later. For this reason, the outstanding balance of a replaced loan need not be taken into account in determining whether the limitations of IRC Section 72(p)(2) have been met; only the amount of the replacement loan plus any existing loans that are not being replaced is considered.Treas. Reg. §1.72(p)-1, A-20(a)(2). If the term of a replacement loan does not end later than the term of the replaced loan, then only the amount of the replacement loan plus the outstanding balance of any existing loans that are not being replaced must be taken into account in determining whether IRC Section 72(p) has been satisfied.Treas. Reg. §1.72(p)-1, A-20(a)(1).Multiple LoansWhere a participant receives multiple loans from a qualified retirement plan, each loan must separately satisfy IRC Section 72(p), taking into account the outstanding balance of each existing loan. The refinancing rules do not apply because the new loan is not used to replace any existing loan.Treas. Reg. §1.72(p)-1, A-20(a)(1). Earlier proposed regulations set a limit of two loans per participant within a single year, but final regulations contain no such limit.Treas. Reg. §1.72(p)-1, A-20(a)(2).