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Loans for the elderly


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#1 kan

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Posted 25 September 2002 - 12:57 PM

Is it possible for a plan not to allow someone of retirement age to take a loan from their 401(k) even if they are actively employed?

Our recordkeeping system (OMNI) seems to prevent a participant from taking a loan if they have already reached retirement age or if the terms of repayment exceed the number of years until the participant reaches retirement age.

#2 Katherine

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Posted 25 September 2002 - 01:55 PM

I don't know the answer. I'm sure that it's doing that because it anticipates that repayment of the loan will be accelerated if the participant terminates at normal retirement, so it is denying the loan in the first place. But note that the "reasonably equivalent basis" rule in Labor Regs. Sec. 2550.408b-1(B) requires that loans be available to all plan participants without regard to the individual's age. I don't know whether under age discrimination laws you are allowed to assume that the participant will terminate employment at the plan's normal retirement age.

#3 Fredman

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Posted 25 September 2002 - 02:08 PM

From purely a system (and not a loan policy/compliance) view:

Check data element PL886. This field controls whether a loan is required to be paid by normal retirement age (or whatever age you enter). For example, if a participant is required to pay off a loan by or before his or her retirement age of 65, then enter 65.

Disclaimer: the loan policy should be reviewed to determine what this field should be set at.

#4 Kirk Maldonado

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Posted 25 September 2002 - 04:44 PM

I think that refusing to allow older employees to receive a loan would constitute impermissible age discrimination.
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#5 mbozek

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Posted 25 September 2002 - 06:45 PM

Kirk is correct. Federal ADEA is not preempted by ERISA and the ADEA prevents discrimination in the terms and conditions of employment and benefits against any employee age 40 or older. Restricting loans to persons near retirement age would be a violation based on age which could subject the employer to damages and legal fees of counsel for the employees.
mjb

#6 JCatt

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Posted 26 September 2002 - 10:29 AM

What about the reasonable expectation that the loan will be paid back? I mean, if a 65 year old employee requests a primary residence loan with a 20 or 30 year duration, could it be argued that there is no reasonable expectation that they will be still working, or living, through the loan period?

#7 BFree

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Posted 26 September 2002 - 03:14 PM

Given that JCatt's questions about loans may be appropriate in a commerical lending situation, I don't think the question is unreasonable when applied to a benefit plan. How do you know unless you ask?

#8 Carol V. Calhoun

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Posted 26 September 2002 - 03:30 PM

The practical answer is that to the extent that an employee's age indicates that s/he might not be making payments for the next 30 years, it also indicates that s/he will not need a house to live in for the next 30 years. And when the house is sold, the mortgage will be paid. (Lenders typically lend less than the full value of the house, to make sure that this will be so even if the house goes down in value.) So age should not affect credit-worthiness.

And in any event, ADEA says what it says, regardless of what you may think of it. So denying a loan to an employee based on age is simply not permissible.

#9 mbozek

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Posted 26 September 2002 - 03:41 PM

No reasonable expectation of repayment??? Where is that permitted in the ADEA? Under the equal cost/equal benefit rule an employer can provide a lower level of benefits to employees 40 and older based upon additonal costs. In other words the plan sponsor must justify loans on less favorable terms to older employees by showing a higher cost than the cost/default rate for loans to younger employees. Highly unlikely if the repayments are by salary deduction. Also payoff can be effected without default by paying off the loan at termination of employment.
mjb

#10 R. Butler

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Posted 26 September 2002 - 03:41 PM

If you have the capacity to contract you can't be discriminated in obtaining a loan on the basis of age

#11 Belgarath

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Posted 27 September 2002 - 01:59 PM

Interesting discussion. Is anyone aware of any legal decisions specifically involving this question? Because it is a VERY common clause in IRS approved Prototypes and Volume Submitter documents to not permit a loan which has a repayment period extending beyond the participant's Normal Retirement Date.

And it's a lovely little Catch-22 for a plan Administrator/Trustee. On the one hand, you have the ADEA problem, if that does in fact trump all other rules and document provisions, and if you abide by ADEA, you violate the terms of your document, for which the IRS can hang you if they so choose. Charming.

#12 mbozek

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Posted 27 September 2002 - 02:18 PM

Bel: Have you ever read a favorable determinaton letter?. Paragraph 4 of the letter for individual plans states " This letter relates only to the status of your plan under the IRC. It is not a determination regading the effect of other federal or local statutes." I believe there is similar language in the m & p plan letters. It is the duty of counsel for the plan to make sure that the plan terms do not vioate other federal laws and to question the authority for such a provision by the IRS. I dont believe the IRS has any authority to require such a provision in any plan since it has never been required in an indiviually designed plan.
mjb

#13 Kirk Maldonado

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Posted 27 September 2002 - 03:07 PM

Belgarath:

I find it hard to believe that the IRS would try to disqualify a plan because it did not engage in impermissble age discrimination.
Kirk Maldonado

#14 mbozek

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Posted 27 September 2002 - 03:48 PM

Kirk:Remember under IRS regs a qualifed plan can be disqualfied if it is not administered in accordance with its terms, and according to IRS speakers, this includes provisions which have nothing to do with qualification of the plan. So the failure to stop loans after retirement age could disqualfiy the plan. This is one good reason why the IRS should not be allowed to apply its regulations beyond the IRC provisions.
mjb

#15 Carol V. Calhoun

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Posted 27 September 2002 - 03:56 PM

The point is, a provision to disallow loans after NRA shouldn't be in the plan in the first place. You can't put an illegal provision in the plan, then claim that you have to leave it there because operating the plan in a way not in compliance with its terms would disqualify it.

As for the security issue, it is perfectly permissible to say that a loan must be repaid upon termination of employment, or before distributions are made. Seems to me that gets at the security issue, without impermissible age discrimination.

#16 mbozek

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Posted 27 September 2002 - 04:32 PM

I agree with Carol: Before I saw this post on the message board I had never heard of a plan with such a provision and think it should be removed even from M & P plans because of the liability risk to the M & P sponsor. However, my comments were directed at various statements by IRS officials over the years as to global authority of the IRS to require that plans be operated in accordance with all provisions. Last time I looked, an M & P plan can only be amended by its sponsor, not an adopting employer.
mjb

#17 Kirk Maldonado

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Posted 27 September 2002 - 05:33 PM

Mbozek:

I realize that the IRS has the authority to disqualify the plan in these circumstances, but I find it very hard to believe that they ever would do so. The amount of bad press that they would get from that action would be a disaster. I've not seen any blunders of that magnitude in recent years, and given the adverse attention that they got from Capitol Hill a few years ago, I doubt that they would undertake any actions that would be so absurd.
Kirk Maldonado

#18 mbozek

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Posted 27 September 2002 - 08:33 PM

Your comments have put into context the absurd IRS position that a qualified plan must be administered in accordance with all of its provisions even those that do not have any relationship to qualification under the IRC. Maybe the kindler, gentler IRS will deep six such a position.
mjb

#19 Kirk Maldonado

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Posted 27 September 2002 - 11:36 PM

I guess that there are degrees of absurdity.
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