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Participant loan errors as reportable prohibited transactions


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I have been practicing in this area since ERISA became the law of the land, so it is interesting to find something that seems like it should be obvious, but apparently isn't. 

The question is When does a participant loan failure become reportable on Schedule G of Form 5500.  The filing instructions say not to report the following:

Do not report in Part I participant loans under an individual account plan with investment experience segregated for each account, that are made in accordance with 29 CFR 2550.408b- 1, and that are secured solely by a portion of the participant’s vested accrued benefit. Report all other participant loans in default or classified as uncollectible on Part I, and list each such loan individually.

But, ERISA Reg. Section 2550.408b-1 requires that the loan be made in accordance with the plan's written procedures. 

Which, if any, of the following would you consider a prohibited transaction?

 

a. Written loan program satisfies conditions of DOL regulations and IRS standards to avoid taxation, but:

 

  1.  A loan is made in excess of $50,000.
  2. A loan is set up with semi-annual payments.
  3. The loan payment schedule is o.k. but payments are inadvertently not started on time.  Issue is discovered and corrected before the end of the default period.

 

b. Written loan program does NOT satisfy the conditions of the DOL regulations, loans may be made up to 50% of vested balance of NHCEs or 100% of vested balance for HCEs.

c.  Loan is made that is consistent with IRS requirements, but written terms of plan do not permit such loans.  Errors is corrected under EPCRS.

 

It seems to me that case b. would trigger reportable PTs.  It seems that case a.3. should not be a PT.  But, things like cases a.1. and a.2. happen and I rarely/never see them reported on Schedule G.  They are either treated as taxed or corrected under EPCRS.  Case c. can be corrected under EPCRS, but sure seems like it would not be an exempt transaction.  Remember for purposes of schedule G - all employees of the plan sponsor are Parties In Interest.

So - what do you guys think? 

 

Thanks in advance - Becky

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There is an ability to loan a participant up to $10,000; even though the vested balance is not $20,000.  This provision is SELDOM (if ever) used.  So, it's possible to have one of these loans go into default. If made, it still has to be adequately secured (since it exceeds 50% of the vested balance); which places the onus on the plan administrator to begin repossessing whatever was used to secure the loan.

Good Luck!

CPC, QPA, QKA, TGPC, ERPA

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I don’t venture answers to your questions, but suggest one aspect for the plan administrator’s interpretation of the Form 5500 Instructions.

 

In applying the bit you quoted, one might separate IRC § 72(p) from ERISA § 408(b)(1).

 

For at least some plans and some circumstances, a participant loan might fail to meet a condition concerning income tax treatment under IRC § 72(p) without necessarily failing to meet the conditions for the ERISA § 408(b)(1) exemption.

 

For example, if a participant’s vested account balance when the loan was made was $300,000, a loan of $100,000 could be adequately secured under 29 C.F.R. § 2550.408b-1(f)(2) and, depending on the plan’s and a procedure’s provisions, could meet all conditions of 29 C.F.R. § 2550.408b-1.

 

Peter Gulia PC

Fiduciary Guidance Counsel

Philadelphia, Pennsylvania

215-732-1552

Peter@FiduciaryGuidanceCounsel.com

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