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In my opinion, I don't care what the loan documents say. This loan was not permitted under the Plan. The Plan terms were violated and there is an operational failure. Tell the participant he needs to pay the loan back in full because this is a distribution when no distribution was permitted and we handle like a Refund of Excess Amounts under EPCRS. I mean, this Plan has a hardship loan provision. This is similar to asking for a hardship withdrawal, receiving it, but there was no hardship. So what if there's a loan promissory note. That note is a contract and is voidable ... contracts that are entered into under fraud or misrepresentation are unenforceable. Let him take us to court if he wants to enforce it. He has to tell the court that even though he lied to get the loan, we have to let him pay back installments... no we want the entire amount back because he lied. While he is talking to a lawyer (who won't take this) or going to small claims court (where it is preempted), we notify him to return the entire amount to the Plan plus earnings, no rollover. Assuming he doesn't return the full amount (so plan stopped taking loan payments), Plan issues a 1099-R with loan proceeds as taxable, indicating no rollover eligibility. Let him worry about early withdrawal penalty. If he has a problem, tell him to argue with the IRS. We have a reasonable position, misrepresentation, violation of plan terms, self-correction per EPCRS. Just my opinion..... oh, and I am having just a really peachy day....

I have no argument about use of a promissory note as best practice. A promissory note is a device that facilitates enforcement/collection as a matter of civil procedure. It is not essential for creation of a valid, enforceable obligation to pay. As suggested by Lucky32, it is taken for granted in commercial lending practice, which is the standard for plan loans. So why would a fiduciary not employ one?

Most plan documents include basic loan provisions about the availability of loans, and then refer to the plan's loan policy to provide the details about how the loan will be administered. The loan policy typically can be changed without amending the plan document. This sort of dual controlling provisions/policy does have the potential to cause some confusion. Notably, the loan policy can specify conditions that will cause the loan to become immediately due (as is common when a participant leaves employment), even though this is not a mandated, regulatory requirement. The loan policy also can specify how loan repayments must be made (e.g., through payroll) and other means of making repayments are unacceptable. In this instance, the loan is not violating any likely plan provision, but it is violating the loan policy. The company seems to want to work with the participant by allowing the participant until the end of the year to remedy the situation. Consider taking these steps: Review the requirements of the loan policy. Inform the participant that the loan is in violation of the policy, and beginning after the first loan repayment in July the plan will no longer accept loan repayments because of the violation of the loan policy. Inform the participant of the loan policy related to the cure period for not making loan repayments (which commonly would be as of the end of the quarter following the quarter in which the last loan repayment was made). This should give the participant until the end of the year to repay the loan. Inform the participant if the loan is not repaid by the end of the cure period, is will be considered a deemed distribution and taxable. Adjust the steps to conform to the provisions of the actual loan policy. Good luck!

1. What do the loan documents provide? For example, is fraudulent application a breach? Does the loan have an acceleration provision for the breach? Does any fiduciary have any discretion over remedies for breach? 2. What do the plan documents, broadly considered, provide? Does the employer have any say in this? I know that everyone presumes that the employer is the, or a, fiduciary with such powers. I have asserted now and then that that is not a good design, especially for a larger organization. 3. Do you have any say this? What do your engagement documents provide? Or are you just curious?

Apart from the Form 5500 question: If a plan’s governing documents grant the plan’s administrator discretion about whether to pay or omit an involuntary distribution, shouldn’t an administrator fear that discretion? If a fiduciary has that discretion, must the fiduciary decide loyally and prudently “for the exclusive purpose of [] providing benefits to participants . . . ”? Must a fiduciary decide whether paying or omitting the distribution is in the participant’s best interests? If so, must a fiduciary use ERISA § 404(a)(1)(B) “care, skill, prudence, and diligence” to form that discretionary decision-making? What facts must or should an administrator consider in deciding whether to pay or omit a discretionary involuntary distribution? (The underscore is not mine.)