ScottCPFA

Thank you Paul, "prohibited transaction" may be the treatment for my "bur'. Scott

Thank you for your reply. My intial thoughts reminded me of an IRS or DOL ruling where a group of physicians took participant loans from the plan and made the notes for an interest rate of something high, like 30%, as a scheme to contribute more money in the plan. The rank and file employees with loans had normal interest rates. Predictibally the physicians were duly punished, but it also was the basis of current loan policies related to rates of interest being comencerate with a published or market determinable rate. It was back in the 80's or 90's but I can't remember where I heard about that. My main concern is it cannot be logically explained to anyone, like the accounting firm doing the audit. To move the plans recordkeeper would also mean leaving the financial institution, which is doing a fabulous job. I was hoping to find some DOL, IRS or even some lending or banking regulation that would at least give more basis for something obviously faulty and probably driven by a lead programmer who is lacking. I appreciate your time. Scott

I ran across what I think is an issue with a recordkeeper. I have several plans as a TPA that submitt payroll deducted 401k loan repayments. The employees model loans from the recordkeeper custodian site. Loans are granted by filling out a paper form that is submitted to the recordkeeper along with a loan amoritization schedule generated from their site. Employees in one plan receive bonuses and pay off loans early or increase their weekly 401k loan payment deductions to pay off the loan earlier. The recordkeeping company has new software for applying loan payments. It applies the current payment on the schedule and if there is an amount in excess of that payment the exess is applied to the next full interest and principal payment, if less than a full payment the excess is applied to future interest on the schedule only rather than principal. It has been so long since I have done a deep dive into participant loan repayment details but it seems to me that violates some type of rule. It appears to me that you can't pay interest on a loan that is not due or has not accrued. I think you would run into a situation where the actual interest rate on the loan, based on loan interest payments, was greater than the schedule if you then paid it off early. I also think this would cause an issue administrating accrued loan interest if a loan defaulted, what interest would accure if you already made future interest payments. There also might be a potential for some type of discrimination if someone paid a loan off early about the same time frame on the schedule another employee paid larger payments on than shown on the schedule then paid off the remaining balance early specifically if in these 2 examples one employee was HC and another NHC. I may be off base or confusing some other regulation, but it would be logical to assume, even in a simple lending agreement, you cannot apply a payment to interest in excess of the normal payment that is not acrued or in the future and not due as shown on the schedule that was used to establish the loan and the note. Scott