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Loan Source restrictions - time for a new recordkeeper?


justanotheradmin
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Plan uses a common record-keeper/custodian that also processes participant loans online. Principal. 

The plan assets consist of only deferrals and safe harbor match(100% vested, not QACA). The plan's loan policy restricts the loan proceeds source to just deferrals. Well, I suppose that's how my interpretation has always been of this particular policy language.

"Source of Loan. Participant loans are may be made from all available contribution sources, to the extent vested unless designated otherwise under this section." 

For this plan it is designated otherwise and specifies that only Pre-tax Deferrals and Roth Deferrals are eligible. 

John Doe participant has the same amount of $ in deferrals and SH match. The record-keeper is unable / refuses to process a loan for 50% of the participant's vested balance (essentially 100% of the deferral balance). They are insisting the only way it is possible would be for the plan to amend it's loan policy to allow loan the loan to be take from all sources. 

I disagree. Loan source restrictions on proceeds are common, for a variety of reasons, I see it done a number of different ways. What I don't usually see (maybe have never seen) is a source restriction on the 50% max value part of the calculation. I don't even think that is allowed, but I'm not able to find a citation. I remember the days when sponsors had two plans, a money purchase, and a separate 401(k) PS, and we would aggregate the balances between plans for the 50% calc, even though the loan was only allowed from the 401(k) plan. 

Am I wrong? 

If I'm right, does anyone have suggestions for pushback to the provider? Citations? 

 

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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I definitely think you are wrong especially about aggregating the balances in two plans to determine the amount available from one plan. If a source is unavailable, i don't see how that is any different than trying to use unvested money as collateral.

William C. Presson, ERPA, QPA, QKA
bill.presson@gmail.com
C 205.994.4070
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Forget the aggregating two plans part. 

The participant is 100% vested? why can't the full account balance be considered? (I'm arguing that it HAS to be considered, but baby steps)

The loan dollars would only be paid from the deferral money. I think it depends on the plan's interpretation of "made"

Are you saying if the loan wanted all sources considered for the 50% calculation, but only certain sources for the actual proceeds/repayment the loan policy would have to be written with that level of specificity? Or are you saying that's not allowed at all if the source from the which the loan is paid out is restricted? 

Why not less specificity (i.e the existing language) but interpreted consistently, and in this case in favor the participants? 

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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Even if the plan’s administrator’s reading is a correct or permissible interpretation of the plan’s governing documents, consider that the recordkeeper’s contract might not obligate it to process a transaction or instruction that is outside the way the recordkeeper described the service.

Peter Gulia PC

Fiduciary Guidance Counsel

Philadelphia, Pennsylvania

215-732-1552

Peter@FiduciaryGuidanceCounsel.com

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Can't say what the answer is without seeing the actual documents, but our solution is simple.  Our "standard" loan policy says all vested sources are "lienable" (i.e. count for purposes of calculating the maximum amount available for a loan), but only "x, y, and z" (or whatever) are "loanable" (i.e. are the source of funds available to fund the loan (and may be limit it below the legal max loan available).  The English language is so ... wierd ... just be crystal clear.  And by the way, we'll take the plan on - away from our friends at Principal!

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DMcGovern, no.  A plan’s administrator must follow the plan’s governing documents (unless ERISA’s title I requires something else).

But an obligation or responsibility of the plan’s administrator does not necessarily follow through to its recordkeeper.  A non-fiduciary service provider might not be obligated to perform its service according to the plan’s governing document.  Further, a recordkeeper’s contract might permit the recordkeeper not to process a transaction or instruction that does not fit the recordkeeper’s software.

A plan’s administrator might consider these points in its selection, monitoring, other oversight, and removal of a recordkeeper.

Peter Gulia PC

Fiduciary Guidance Counsel

Philadelphia, Pennsylvania

215-732-1552

Peter@FiduciaryGuidanceCounsel.com

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I agree completely, Peter - but the capabilities of the r/k are a key component of the fiduciaries criteria in selecting the r/k in the first place.  I would have assumed Principal reviewed the plan documents before taking it on, and probably provided the documents themselves.  We have a complete plan design review with a new client during the transition, and hash out "best practices" at that time, and adjust the documents accordingly (restating them, in most cases. to our volume submitter docs).  Bad on Principal (they are not a schlock provider) and should have ensured they could do what the plan requires.  I'm guessing, there is more to this story - and maybe the employee (Principal's) is miscommunicating....

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The plan does not use Principal's doc. It uses a common pre-approved volume submitter document provided by their TPA. Principal restricted the loan sources based on the plan provision form that was submitted at contract set-up, which makes no distinction between sources for proceeds and sources for calculations. They are saying their software has no way to distinguish from "lienable" and "loanable" sources (to borrow @MoJo 's terminology). The plan does use Principal's website to facilitate participant loan requests, so when a participant tried to request a loan, it was only calculating / allowing 50% of the deferral balance.  The plan is a few years old, but this appears to the be first time a loan has been requested. 

I find that software limitation to be absurd and wanted to know what others think. 

Looks like the plan might be shopping for a new recordkeeper. 

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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2 hours ago, MoJo said:

Can't say what the answer is without seeing the actual documents, but our solution is simple.  Our "standard" loan policy says all vested sources are "lienable" (i.e. count for purposes of calculating the maximum amount available for a loan), but only "x, y, and z" (or whatever) are "loanable" (i.e. are the source of funds available to fund the loan (and may be limit it below the legal max loan available).  The English language is so ... wierd ... just be crystal clear.  And by the way, we'll take the plan on - away from our friends at Principal!

This an excellent description and looks like (with the right loan policy), I'm wrong.

William C. Presson, ERPA, QPA, QKA
bill.presson@gmail.com
C 205.994.4070
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I ran into the same issue with another large Recordkeeper, where the PS assets were in a commingled brokerage account. However, participants could only borrow from their Deferral source. This was explained to the Recordkeeper. They turned off the online loan portal and we process the loans with our TPA software. When we fax the Loan Request form to the Recordkeeper, we are required to include a notation that the participant's total account balance is sufficient to support the requested loan proceeds.

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