Guest Article

(From the August 9, 2010 issue of Deloitte's Washington Bulletin, a periodic update of legal and regulatory developments relating to Employee Benefits.)

Most Plan Loans Now Exempt from Truth-in-Lending Act Disclosures

On July 1, 2010, revised regulations issued by the Board of Governors of the Federal Reserve System became effective to exempt most plan loans from the Truth in Lending Act's (TILA) disclosure requirements.

The TILA requires a person who regularly extends consumer credit (i.e., generally, one who extends credit more than 25 times in the current or preceding calendar year) to disclose certain of the key terms of the arrangement. The purpose of the disclosure is to provide the information necessary to protect consumers from unfair billing practices and to enable them to make informed choices about the use of credit. The specific disclosures required under the Act depend on whether the credit is extended under an open-end plan or a closed-end plan. Participant loans from employer-sponsored retirement plans were previously subject to the Act as closed-end plans. As a result, retirement plans that extended more than 25 loans per year were obligated to disclose, in the format prescribed in the regulation, various terms of the loan, including the amount financed, an itemization of the amount financed, the finance charge, the annual percentage rate, the payment schedule, the total of payments, any demand feature, any prepayment penalties, any late payment charges, any security interest held by the creditor, etc.

In deciding whether to carve out an exemption for plan loans, the Board examined the nature of the loans against the purpose of the TILA. The fact that in plan loans the interest and principle payments are reinvested in the participant's own account, and no third-party creditor imposes finance charges on the participant, were critical features in the Board's decision to exempt them from the Act's requirements.

As a result, effective July 1, 2010, exempt from the TILA are loans to plan participants that are made in accordance with Internal Revenue Code requirements from fully-vested funds in the participant's own account in:

See §226.3(g) and the Preamble to the revised Regulations.

Notably, by its terms, the exemption applies only to loans extended to plan participants, so it would not apply to loans extended to a beneficiary or an alternate payee under a QDRO. Nor would the exemption apply where the loan is made other than in compliance with the Internal Revenue Code requirements. For example, loans that inadvertently violate the Code §72(p) parameters (e.g., the maximum 5-year term, the maximum loan amount, the level amortization requirement, etc.) would not be covered by the exemption and, therefore, would be subject to the disclosure requirements. Also, in the event a Code §401(a) plan fails to be qualified, the applicability of the exemption would be an issue.

Although the TILA disclosure requirements may no longer apply, plans subject to ERISA's disclosure requirements are nonetheless obligated to include in the summary plan description a disclosure of any "fees or charges" that may be charged against the participant or beneficiary (or their individual accounts) as a condition to the receipt of benefits. Participant loan fees would fall within this category if they are so charged. See Department of Labor Regulation §2520.102-3(l).

The information in this Washington Bulletin is general in nature only and not intended to provide advice or guidance for specific situations. If you have any questions or need additional information about articles appearing in this or previous versions of Washington Bulletin, please contact: Robert Davis 202.879.3094, Elizabeth Drigotas 202.879.4985, Mary Jones 202.378.5067, Stephen LaGarde 202.879-5608, Bart Massey 202.220.2104, Tom Pevarnik 202.879.5314, Sandra Rolitsky 202.220.2025, Deborah Walker 202.879.4955. Copyright 2010, Deloitte.