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Loan provisions in 403(b)'s...?


Guest Garry
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Do loan provisions apply to 403b's just like any other defined contribution plan? or are some of the rules different?

Thanks

Garry

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  • 2 weeks later...
Guest CVCalhoun

The only difference is that interest on a loan of salary reduction contributions from a 403(B) plan will not be deductible. IRC section 72(p)(3). This is the same as the rule for salary reduction contributions under a 401(k) plan, but is different from the rules for other qualified plan loans.

[This message has been edited by CVCalhoun (edited 08-31-98).]

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Guest CVCalhoun

I actually have some experience with Dave's question, and the answer is that the provisions don't work terribly well.

The problem is that employers often do not want to be terribly involved with their own 403(B) plans. This is particularly true in the case of private (not governmental or church) employers, since too much involvement in a plan risks subjecting the plan to ERISA. So the employers typically leave hardship loan and withdrawal questions up to the providers (insurance companies or mutual funds).

However, unlike 401(k) plans, which typically allow only choices among various mutual funds of a single issuer, 403(B) contracts are typically marketed directly to employees by a variety of providers. Thus, the providers are typically competing with each other to get employees' business. And all penalties for messing up the 403(B) rules are imposed on employers and employees, not providers. Thus, the providers are often inclined to allow "hardship" withdrawals or loans for almost any purpose, even ones that would be hard to justify as a hardship.

In other words, no one is minding the store. And I have some concerns about whether IRS is at some point going to decide to audit this issue, since it is such a common one.

[Note: This message was edited by CVCalhoun]

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