Soldiers and Sailors Relief Act

[Guest Kurt_Johansen]

anyone aware whether the above act has been invoked and if so, whether that means all plan loans to active military personnel are limited to a 6% interest rate?

[MGB]

The 1940 Soldiers and Sailors Relief Act does not need to be "invoked", it is always in effect.

However, it only limits the interest rate to 6% if the employee has been financially disadvantaged by entering the service. I.e., if an employer grosses up wages while on call-up, the 6% does not apply. The onus is on the lender to prove they were not financially distressed in order to maintain a higher rate.

I calculate the interest rate in the regulation example to be over 9%. It is disturbing that they never mention the 6% requirement, but I do not know what agency produced the proposed regulations and whether they also have oversight over the 1940 Act.

[Guest P A Weick]

During Desert Storm our outside counsel's view was that the 6% rate applied to reservist's plan loans during active duty service. Nothing in USERRA addresses the issue and IRS said nothing about it in the Proposed Regulations on plan loans. So I think the 6% rate will still apply.

Also, be careful about the financial distress issue. The applicable provision of the Soldiers and Sailors Civil Relief Act (50 App USC Section 526) speaks of the lender applying to a court for its determination of whether the participant's ability is "not materially affected by reason of such service". A plan administrator may want to discuss with their counsel whether they need to go to court on that one and not automatically assume that because they are continuing salary payments that there has been no material impact on the participant arising from service.

It sure would be nice if IRS gave us some guidance on these issues. We have grappled with them twice in the past decade and should have something official to follow.

[Guest PAL100759]

Our recordkeeper has advised us that their compliance area believes this act only applies to commercial loans - any thoughts??

[Guest P A Weick]

The statute does not make any such distinction. It says that no "obligation or liability" incurred before call up can after call up bear a rate of interest in excess of 6%. Whatever else it is a plan loan is an obligation. If it is not enforceable as an obligation at state law it fails as a plan loan. I would be interested in where your recordkeepers got their information as I could find no decided cases under that statute.

[Guest ckeller]

The language of the statute does not reference "commercial" obligations or liabilities but there are a number of military websites that indicate this is how the statute has been interpreted. However, if the Department of Labor views a plan loan as a commercial transaction, the SSCRA will apply.

[Guest Rebecca Amthor]

I have called DOL and have been told to call back in a week or so. Has anyone else heard why there might be such a delay? ERISA does not preempt other federal law unless specified.

What am I missing here?

[Medusa]

Wanted to mention that the PWBA website does now address this issue:

PWBA Frequently Asked Questions

Search on the page for "loan" and you will find their answer to the question.

[MGB]

I find their statements somewhat troubling. I assumed (dangerous to do, given that I am not an attorney) that if an employer grossed up wages so that there was no financial harm, that the interest rate would not need to be reduced to 6%. Obviously, the DOL thinks you need a court order to determine "no financial harm," rather than common sense.

The law refers to "financial harm" by entering the military. The DOL has interpreted this to be "ability to pay," which is a completely different concept.

From the DOL Q&A'S:

Q: Under the Soldiers' and Sailors' Civil Relief Act, creditors are required to drop interest charges down to 6% on debt owed by those called to active duty. Does this apply to a loan from my pension plan?

A: Yes. Under the Soldiers’ and Sailors’ Civil Relief Act (SSCRA), creditors, including a pension plan, are required to drop interest rates down to no more than 6% on debt owed by those entering military service for the period of such military service. Further, under the Employee Retirement Income Security Act (ERISA), the loan will not fail to be a qualified loan under ERISA solely because the interest rate is capped by SSCRA. Under SSCRA, a plan fiduciary could petition a court to retain a higher rate based upon the individual's ability to pay.

Q: If I prefer that the interest rate remain higher so that I can accumulate more money in my pension plan, is the plan administrator required to comply with the Soldiers’ and Sailors’ Civil Relief Act and unilaterally reduce the rate?

A: A plan fiduciary could petition a court to retain a higher rate based upon the individual's ability to pay. Absent an order from the court, however, the plan fiduciary would be obligated to reduce the interest rate.

[david rigby]

Suppose a DB plan with mandatory employee contributions:

1. Is it possible that SSCRA could be interpreted to require the employer to make contributions on behalf of the employee?

2. Is it possible that SSCRA could be interpreted to require a minimum of 6% interest?

I think the answer to both is NO, but let's hear other opinions.