Quite often our loan administration group has situations where the final payment owed on a participant loan is a very small amount, e.g. less than $5.

This occurs for various reasons, such as additional accrued interest on delinquent loans, extra payments being made at some point, or payments being made off schedule during the course of the loan for one reason or another.

Can it be justifiable to have a policy under which these final loan payment amounts owed are simply written off? The thinking is that the extra administrative cost of processing the final payment of such de minimus amounts outweighs the benefit of collecting the final payment.

I know this would be contrary to the letter of the law but I was wondering if perhaps you could analogize it to the same principle the IRS has relied on in the EPCRS revenue procedures where the cost of doing something exactly right is weighed against the minimal benefit you obtain by being precise.

Also, from a real world perspective what is the likelihood of this being a significant issue in the eyes of the IRS or DOL? I am not sure if they look for these types of things or not in an audit.

Comments?

I believe that investment firms that recordkeep loans record interest and payments on a daily basis so that they're never in synch with the amortization schedule, and then adjust it so the loan is paid off with the last payment as long as it's "close." I don't know what they use for "close" but I bet it's more than $5 and I think it's fine.

We usually apply payments as called for on the amortization schedule and don't have this issue, but occasionally they get a bit "off." If it's a tiny amount like that we'll just adjust the interest on the last payment, effectively writing it off but it's very, ah, subtle.