FundeK

Calling all recordkeepers or administrators - Can I get your opinion on or experience with accepting faxes or copies of documents related to participant distributions vs. requiring the participants to send documents with original signatures. I would like to know what your practices are and what you feel the risk is related the accpetance of documents with non-original signatures. Thanks!

The loan program indicates that loans will immediately become due and payable upon termination of employment and if not repaid, it will be offset. There is no mention of how to treat loans upon death. Generally, if a participant were to terminate, they would have about 90 days to repay in full before an offset would occur. In this case, I would think that the beneficiary would have the same timeframe to make payment or complete the rollover. It all makes sense on paper, but something is telling me a beneficiary can't assume the loan liability and make ongoing payments. What do you mean by the loan being assigned by its terms upon death?

Can a spousal beneficiary who is a participant in the same plan as the deceased participant, rollover the participant's loan balance into her own account and assume repayments? I found this in the ERISA Outline Book: If the participant has an outstanding loan at the time of death, the participant's death will usually result in an offset of the unpaid balance against the accrued benefit. The participant (or the participant's estate), not the beneficiary, will be liable for any taxes resulting from that offset, because the beneficiary is not a party to the loan agreement. The tax liability might be reported on the participant's final income tax return or on the estate's income tax return. The taxation of loan offsets is addressed in Treas. Reg. §1.72(p)-1 and is discussed in Section IX, Part E., of this chapter. The plan's loan policy might allow the beneficiary to assume the loan obligation and make repayment. A surviving spouse might do this, for example, in order to repay the loan and increase the amount available for rollover by the surviving spouse. I also found this in the ERISA Outline Book: If benefits paid to a surviving spouse of the plan participant are made in the form of an eligible rollover distribution, the surviving spouse may elect to rollover such distribution, subject to the same rollover rules that apply to participants. So, I take this to mean that if the plan allows participants to rollover loans (which I know isn't all that commone) then the spousal beneficiary would be able to rollover the loan and assume payments. Is that correct? Doesn't feel quite right. Any thoughts would be appreciated!

In my experience, many don't know about the exception for spouse's and assume it is the same for both because the document just references the regs and doesn't always call out the difference. Can the original poster clarify exactly what the document states?

For spousal beneficiaries ONLY. A spousal beneficiary must commence distributions by the later of 1) December 31 of the calendar year that follows the calendar year in which the participant died, or 2) December 31 of the calendar year in which the participant would have attained age 70 1/2 So, a spousal beneficiary, depending on the terms of the plan document, could leave the money in the plan with an election to start installments in the year in which the participant would have attained age 70 ½. Based on the information you provided, you do not need to force a lump sum, but would need to force and RMD in 2015.

Does the interest get credited to the affected participant accounts and posted as interest? Is this a self correction that does not need reported? Thanks!

Does anyone know the proper correction for a plan which has charged an incorrect interest rate on participant loans? Hypothetical situation: Plan's loan program indicates a "reasonable rate of interest". Plan intended to charge prime +2, but recordkeeper's sytem mistakenly "froze" the interest rate in for a period of time 2005 (no interest rate updates were made when prime changed). In 2006, a system update was made which caused future interest rate changes to be made to the plan, but the "base" interest rate was now off the mark because of the time it was "frozen". (system calculates new interest rates by looking at the old one on the system and adding or subtracting the rate increase or decrease). So if prime went up by .25%, the interest rate for the plan also went up, but it never caught up to prime +2%. So, the plan charged an interest rate that was below what it intended, and at times below prime. Does a correction need to be made? Also, prior to 2005, all loans issued were prime +2%.

A participant passed away in 2002. He had been receiving RMD payments of about $1,100, but apparently not cashing all of them. The spousal beneficiary just found one that was issued in 2000! (Not sure yet, but there could be more). How should this be handled? Can we reissue the check to the beneficiary or should it be reissued to the participant who obviously can not cash it? Any guidance would be appreciated.

If your plan allows in-service, then yes it is allowed. The account balance only needs to be used as security at the time of the origination of the loan, not throughout the entire life of the loan.

No takers huh? Did I phrase the question okay, or are they not clear? I am just not sure what kind of withdrawal restrictions should be place on funds attributable to an after tax deemed loan repayment.

I personally haven't heard of this "new" regulation, and I try to stay on top of things as well. I think Kirk response best answered your question. Probably just an "urban legend" in the financial community! Definitely the best thing to do!

I must have been typing my response as others were posting theirs. I am just too slow, they beat me to it!!

Wow, such aggressiveness from some.... When I first read the post , I initially took it to mean the participant wanted all of his fees (such as trading fees, maintenance fees, etc) charged to the business, not necessarily plan administration fees and trustee fees. If GBurns read the post the same as I did, his comments would make alot more sense.Why don't we let GBurns answer Kirk's post first....

I also posted this question in the Distributions & Loans Forum....I wanted to make sure everyone got a chance to take a look, so I also posted here! Okay, I understand the loan repayments on a deemed loan generate basis and are not considered employee contributions for purposes of the nondiscrimination test under §401(m) nor for purposes of the §415 limits. My question is, how are these repayments treated for future distributions? For all of the recordkeepers out there.....(or anyone else who can answer this!), how are the loan repayments put back into the participant's account? For example, you have a deemed loan repayment of $3,000. The original loan was taken out as $2,000 deferrals, and $1,000 match. When you process the deemed loan repayment, do you have to deposit back into the account as deferral and match, or can you redeposit it as after-tax? If you have to deposit it as deferral and match, you now have basis in "pre-tax" sources? If you redeposit it as after-tax, are they now subject to after-tax withdrawal requirements? Any cites would be greatly appreciated!!

Couldn't he pay "in advance"? So, you amortize the loan for quarterly payments, he makes a years worth of payments when the first quarter is due, and then in a year, makes another years worth of payments. So, he never goes delinquent because he hasn't missed a "scheduled" payment. I am grasping at straws here..... Anyway, I think the real problem is that the loan should be considered a deemed distribution from the time it was issued because it didn't meet the level amortization requirements from the beginning. Anyone agree?