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Rebalance 401(k) Account / Participant Loans


austin3515
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So if match is a distributable source why not take a distribution from Match - and then use the proceeds to pay off the loan?

Mandatory withholding would make the distribution larger, but if the ER is willing to front the 20% to go towards repaying the loan, it doesn't have to be. 

For example $5,000 distribution, $4,000 to participant after withholding. ER gives Participant $1,000, participant uses the $4,000 + $1,000 to repay the loan. 

It would avoid the rebalance question entirely. 

I'm a stranger on the internet. Nothing I write is tax or legal advice. 

I'd like a witty saying here, but I don't have any. When in doubt, what does the plan document say?

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Here is another example. Participant A has $10,000 of Match and all of it is allocated to an illiquid privately held stock.  Participant also has $10,000 of liquid mutual funds in his 401k account (yes, of course this can happen, just because it never would doesn't mean it could not).  Now the Match says you can take everything after 5 years of participation, and the 401k says you have to be 59 1/2 and this guy is only 40.  And he wants an in-service distribution.

How do you all feel about moving the illiquid investment sourced to match into the 401k account, and transferring the liquid investments sourced to 401k  into the match? If this is OK, then my scenario should be ok.

If you're not sold, how about this?  The participant is magically able to sell the illiquid investment to cash, and turn aorund and by liquid investments within the match account.  He then sells all of his liquid funds in his 401k account, and buys the same illiquid investment back the very same day, all within his 401k account.  So now I have moved my illiquid investments to my 401k account, and my illiquid investments to the match account.

If that works (and I cannot fathom a suggestion that the previous paragrpah is not allowable) then merely cutting out the middle step of liquidating to cash should be moot, and back we go.

Austin Powers, CPA, QPA, ERPA

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8 minutes ago, justanotheradmin said:

So if match is a distributable source why not take a distribution from Match - and then use the proceeds to pay off the loan?

Mandatory withholding would make the distribution larger, but if the ER is willing to front the 20% to go towards repaying the loan, it doesn't have to be. 

For example $5,000 distribution, $4,000 to participant after withholding. ER gives Participant $1,000, participant uses the $4,000 + $1,000 to repay the loan. 

It would avoid the rebalance question entirely. 

He ends up with 2 taxable distributions - one for the loan defaylt and one for the distribution.  That;s twice as much in taxes.  And I still end up with basis which is "bad" (in my opinion).

Austin Powers, CPA, QPA, ERPA

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Could he move $3,000 from fund A in deferral to fund A in his match account?  No.

If the loan is an investment, why do you think he could do ostensibly the same thing?

Such a setup could be rife with abuse.

What if there were no basis in deferral.  Loan was taken 100% from PS.  Now the participant transfers part of the loan obligation to deferral.  Is that kosher?

QKA, QPA, CPC, ERPA

Two wrongs don't make a right, but three rights make a left.

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19 minutes ago, austin3515 said:

a) Participant has max # of loans already

b) The plan sponsor has agreed to pay for the tax impact of the default so the participant is whole anyway. Because taxation is unavoidable anyway, they didnt want the guy to have go through all that trouble. PLUS we would end up with basis in the plan, and my feeling is that basis is almost never accounted for correctly in the long-term.

c) We just wan the loan and the problems with it to go away.  Hence trying to rebalance the account to put the loan in a source that is currently distributable.

I guess I missed that the loan was already defaulted. 

Plans track defaulted loans every day. The fact that it might turn into after-tax basis if payments are ever made isn't a new thing. For me, its not a big enough pain to consider a very unorthodox approach to loan management. 

If you are looking for agreement/ validation or a blessing to your approach - I don't see much here. But the boards have been wrong before, and the IRS does sometimes surprise the industry in how it chooses to interpret things. So who knows. I'd love for someone to pose your question to an IRS panel at a conference and see what they say.

I would take this as a lesson to design plan loan policies more carefully, including which sources are used for loan proceeds from the outset. One TPA I know of encourages a hierarchy where loan proceeds are taken first from employer money sources for this very reason. It is often easier to offset than if the loan was taken from deferral. 

I'm a stranger on the internet. Nothing I write is tax or legal advice. 

I'd like a witty saying here, but I don't have any. When in doubt, what does the plan document say?

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36 minutes ago, BG5150 said:

Could he move $3,000 from fund A in deferral to fund A in his match account?  No.

This question overlooks the whole point of all of this which is the other side of the coin.  Could $3,000 in Fund A, 401k, be switched with $3,000 of Fund B in Match.  And the answer is "yeah, obviously."

Please tell me no one disagrees with THAT?

Austin Powers, CPA, QPA, ERPA

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I wonder if you could compare this loan investment more equally to something like a frozen GIC fund. That is you know standard payments of return are going to be paid out on a specific calendar basis, but the investment itself can't be liquified.  So there are no "funds" to switch.  Fund A and Fund B are not equal to this Loan Fund you've created.    You are playing with paper money, not real dollars. That's what is different between other funds and loans. The other funds are backed by real $s. 

The only earnings that this Loan investment is getting (or not) is the interest paid back by the employee.  I just don't see this loan investment equal to other funds/investments.  One can't choose to invest 100% of their 401k balance in the loan investment fund....and honestly trying to make it equal to other plan investments seems risky.  In no general way are participants choosing a loan as a good investment strategy.  Maybe (although I personally don't think so) a good personal financial strategy when extra $s are needed, but not really an investment strategy.  Moving any money between sources has many implications (regardless of what fund they are in)...I think that is my sticking point....it's not about funds, it's about sourcing. The  loan was sourced from specific groups....(in our plan, SH, Match and PS can't be used for loans only Employee money - deferrals/Roth/Rollover, so all is 100% vested, but the Rollover has much easier access to distributions than the deferrals/roth.....moving money between would mean changing the characterization of that money....again regardless of any investment it was in)

I personally wouldn't want to be involved in deciding it this way..... I don't know who your guru is, but if you trust them and rely upon them, then do what you are hoping to do....I'd just make sure my E&O/EPLI was up-to-date.....

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On 8/30/2019 at 11:00 PM, hr for me said:

.I'd just make sure my E&O/EPLI was up-to-date....

For treating a loan like an investment?  And in the face of no plan provision, no regulation, no IRS Q&A, no promissory note provision, no absolutely anything beyond conjecture to suggest that source is as intrinsic to that investment as its interest rate (which is plainly stated in the legally binding promissory note)?  That's really the position here, that somehow source is intrinsic to the loan.  You can;t just say that it is without something written into something legal that makes it so (or a regulation that makes it so, or an IRS position). 

Yeah I don't think this is in the same category as botching the top-heavy issue on a 401(k) only plan. Not even close.

And I would still like others to clarify that you can most definitely trade Fund A in 401k for an equal sum of Fund B in match.  There has been ample suggestion in this thread that that is not possible, but again it implies that somehow source is intrinsic to an investment--it is not.  I'd appreciate it if others would say so if you agree.  This is just totally uncontreversial, but it is the foundation of my argument.  I saw more than one suggestion that what I have suggested is impossible because the funds are somehow "stained" by their source.

Austin Powers, CPA, QPA, ERPA

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So, Austin, could I exchange my 0% vested Fund A in Match to a 100% vested Deferral source in fund B?

What happens when I exchange my guaranteed by statute 100% vested contribution to deferral to a vestable profit sharing source?

QKA, QPA, CPC, ERPA

Two wrongs don't make a right, but three rights make a left.

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A qualified plan "account" for a participant is not like a bank account or, say, a simple brokerage account, everything in one bucket, so to speak.  It contains sub-accounts, one each for every source in the plan.  You cannot switch between sub-accounts, but you can within them.

If you could switch between sub-accounts, why wouldn't everyone move all their unvested profit sharing money to their deferral account?

QKA, QPA, CPC, ERPA

Two wrongs don't make a right, but three rights make a left.

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29 minutes ago, BG5150 said:

If you could switch between sub-accounts, why wouldn't everyone move all their unvested profit sharing money to their deferral account?

In this example, the funds are money, and money is fungible.  You're question is framed in the context of somehow getting a boon for the participant by somehow circumventing the vesting rules.  This ignores the fact that you are transferring an equal sum of money into the profit sharing account.  A you know, people rebalance their accounts in participant directed 401ks all the time, and can indeed switch their accounts between Fund A and Fund B in different sources as I described.  So this actually happens, so it is unclear to me why you would suggest it cannot and therefore presumably does not happen.

And how can you account for the existence of pooled accounts where all  investments are commingled and there is NO attachment of source to any underlying investment?

Austin Powers, CPA, QPA, ERPA

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18 minutes ago, BG5150 said:

A qualified plan "account" for a participant is not like a bank account or, say, a simple brokerage account, everything in one bucket, so to speak.  It contains sub-accounts, one each for every source in the plan.  You cannot switch between sub-accounts, but you can within them.

If you could switch between sub-accounts, why wouldn't everyone move all their unvested profit sharing money to their deferral account?

Could both arguments be correct here?

1. There is nothing specifically prohibiting transferring of the loan asset between sources as it is an investment.  The balance of each source is the same after the transfer.

2. you cannot "vest" unvested assets by moving them from one source to another, just like you cannot remove distribution restrictions by moving them to another source.

So, if you were to rebalance, there is no failure until the assets that moved does something they cannot do, like a distribution before age 59 1/2 or distributing unvested assets.  

There are other examples of things things that are permissible when viewed only on its own, but a failure when all facts and circumstances are considered.  For example, you could terminate a plan and distribute all assets, you could also start a new plan.  Each action viewed by only on its own is permissible, but when considered together the distribution is a failure if there is no other distributable event.  If you move 401(k) assets to profit sharing through Austin's loan rebalance argument, are there any problems if the loan is fully repaid (ignoring interest credited to the source)?  

 

 

 

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Austin, I think you can do what you suggest.  The issues would be whether the plan or loan procedures allow the participant or someone else to choose the source(s) for the loan...presumably at the time the loan is made.  If so, then I don't see why they couldn't change it (the source) later.  If not, well, I don't see why the policy couldn't be changed.  The whole thing seems like a big PITA but I get the reasoning - the alternative being a bigger PITA (maybe).  I'm not sure I would "go there" but I give you some points for cleverness.

Ed Snyder

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Loan is a special asset of the plan as is the cash account for receiving contributions, disbursing participant withdrawals, and processing transfers between plan investments.  If you go to the balance transfer/reallocation screen, I doubt "loan" comes up as an investment option of the plan for asset transfer -- just as "cash" is not an investment option.  Also, you can't transfer a loan note to another investment as there is no $$$ to transfer.  Even if you wanted to pay off the loan, you'd have to take a withdrawal of other investments to repay the loan -- you couldn't just transfer funds from investment to pay the loan.

However, since loan systems are usually integrated with the record keeping system, the repayments are deposited as withdrawn.  It would seem you'd have to refinance the loan to change the sourcing of the withdrawal and repayments to options available under the plan at the time of refinance. 

ERPA

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  • 2 weeks later...
On 9/12/2019 at 9:38 PM, RatherBeGolfing said:

@Bill Presson Bill is it too late to get this question in for the "ask the experts" panel at ASPPA Annual?  

I wonder what kind of discussion we could get with a whole panel of "pension celebrities"...

I'll see what I can do.

William C. Presson, ERPA, QPA, QKA
bill.presson@gmail.com
C 205.994.4070
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On 9/13/2019 at 6:25 AM, austin3515 said:

Great idea!

Austin, can you take the original question and modify it with whatever clarifying comments, etc that you think are appropriate and email it to me at bpresson@egps.com?

Thanks.

WCP

William C. Presson, ERPA, QPA, QKA
bill.presson@gmail.com
C 205.994.4070
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This is what I came up with to really isolate the crux of the question.  I dispensed with all the deemed loan stuff, and just stuck to a straightforward fact pattern that comes up all the time.

Question: Participant's 401(k) Elective Deferral account consists of $9,000 of a participant loan and $1,000 of Mutual Fund A.  Participant's Profit Sharing Account consists of $50,000 of Mutual Fund A (the Participant is already 100% vested in this account).  The Plan exclusively allows for hardship distributions from 401(k) Elective Deferrals. The Participant would be eligible for a $5,000 hardship distribution, except that the liquid balance in his 401(k) Elective Deferral account is just $1,000.  If the Employer/Plan's administrative policies surrounding participant investment direction allowed for it, would the Participant be permitted to elect the following transfer?

Transfer $9,000 of "Loan" TO Profit Sharing (FROM 401(k) Elective Deferrals).
Transfer $9,000 of Mutual Fund A TO 401(k) Elective Deferrals (FROM Profit Sharing)   
Proposed Answer:  Yes.  The balance in each respective plan source is identical before and after the transfer.  The only difference before and after the transfer is the investment breakdown of the investments allocated to each source (as happens normally in a participant-directed 401(k) plan).  The laws governing participant loans are designed to make it clear that participant loans are investments.For example, see page 12 of the following document prepared by the US DOL which states in part regarding participant loans:  "The loans, which are considered investments of the plan, must be available to all participants on a reasonably equivalent basis, must be made according to the provisions in the plan, and must charge a reasonable rate of interest and be adequately secured."
 

Austin Powers, CPA, QPA, ERPA

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