Jump to content
Sign in to follow this  
Guest Laura

Using 403(b) Contract as Collateral for a participant Loan Under an ER

Recommended Posts

Guest Laura

This is a repost from the 401(k) topic

MBozek wrote:

"A; Borrowing directly from the insurer is a common practice in 403(B) plans where there is no trust and the employee uses the assets under the annuity contract as collateral. The insurer continues to pay the fixed rate of interest guaranteed under the annuity contract while the employee pays 1 or 2 % over the credited rate of interest to the insurer. The loan provision is permitted under state insurance law."

Observation: some 403(B) plans are subject to Title I of ERISA, and others are not.

Question: Does your post assume that the 403(B) plan is not an ERISA plan (and accordingly ERISA prohibition on assignment doesn't apply)? Would a state insurance law of the nature you describe be "saved" from preemption? If so, this surprises me because the issue of plan loans is arguably a fiduciary issue, which is outside of the scope of preemption.

Second question: Can these Fund Sponsor-direct loans be made to former employees? I recall that loans to former employees is prohibited, yet I can't seem to find authority for the prohibition.

Share this post


Link to post
Share on other sites

I am not sure that I understand your first Q- ERISA only preempts state insurance laws which apply to the plan- state ins laws which apply to the contract terms, e.g. right to borrow, are not preeempted. Also PTE 77-9 permits loans from an annuity contract.

Q2- since the loan provision is part of the contract the employee can borrow from the annuity after terminating employment. I dont know if the rules under IRC 72p would apply since the annuity contract would not be considered a plan asset and the loan would be subject only to terms of the contract.

Share this post


Link to post
Share on other sites
Guest Laura

I wasn't able to pull the PTE you cited because it predates lexis and westlaw Federal Register coverage. I did read a blurb about it though. Thanks.

I don't question whether the loans you describe constitute a prohibited transaction. Rather, I question whether these loans comply with ERISA Section 206(d)'s prohibition on the assignment of benefits. Just to make sure we're on the same page, I understand based on your prior post, that it is common for a 403(B) annuity sponsor to effect a loan directly to a participant, using the underlying 403(B) contract assets as collateral.

I just don't understand how a 403(B) contract can be used as collateral. Wouldn't the 403(B) fund sponsor (e.g. TIAA-CREF) then be a "creditor", and wouldn't the assignment of the contract to the 403(B) fund sponsor be prohibited under 206(d)? Can I use my 403(B) contract as collateral to buy a car too?

Section 206(d) does not apply non-ERISA plans. Therefore, I thought perhaps your original post related exclusively to non-ERISA plans. Alternatively, I thought, because you mentioned compliance with state insurance law, that this type of provision may be saved from preemption. I guess I got ahead of myself. Sorry for the confusion.

Share this post


Link to post
Share on other sites

IRS reg 1.401(a)-13(d) which applies to ERISA 206, provides that loans which meet the requirements of ERISA are not an assignment of plan benefits.

Share this post


Link to post
Share on other sites

Hi! :D

I have been searching the threads on this site because we have some plans with questions about 403(b) loans and I am confused by PTE 77-9? :( :wacko: :blink:

Where does it say loans from an annuity contract are ok? :huh: 

These are the transactions that PTE 77-9 lists (this was how it looked originally before it was amended a ton of times - it's not even numbered the same now because they changed it to PTE 84-24):

(a) The receipt, directly or indirectly, by an insurance agent or broker or a pension consultant of a sales commission from an insurance company in connection with the purchase, with plan assets, of an insurance or annuity contract.

(b) The receipt of a sales commission by a principal underwriter for an investment company registered under the Investment Company Act of 1940 (hereinafter referred to as an investment company) in connection with the purchase, with plan assets, of securities issued by an investment company.

(c) The effecting by an insurance agent or broker, pension consultant or investment company principal underwriter of a transaction for the purchase, with plan assets, of an insurance or annuity contract or securities issued by an investment company.

(d) The purchase, with plan assets, of an insurance or annuity contract from an insurance company.

(e) The purchase, with plan assets, of an insurance or annuity contract from an insurance company which is a fiduciary or a service provider (or both) with respect to the plan solely by reason of the sponsorship of a master or prototype plan.

(f) The purchase of securities issued by an investment company with plan assets from, or the sale of such securities to, an investment company or investment company principal underwriter, when such investment company or principal underwriter is a fiduciary or a service provider (or both) with respect to the plan solely by reason of the sponsorship of a master or prototype plan.

So sales commissions are ok and buying annuities with plan assets is ok but which one of these makes loans from an annuity ok? 

Share this post


Link to post
Share on other sites

Create an account or sign in to comment

You need to be a member in order to leave a comment

Create an account

Sign up for a new account in our community. It's easy!

Register a new account

Sign in

Already have an account? Sign in here.

Sign In Now
Sign in to follow this  

×
×
  • Create New...