Participant Loans - Terminated EE's

[MBCarey]

Are there any regulations against allowing a terminated employee to continue to make loan repayments if no distribution is taken from the plan.

[mbozek]

There is no regulation of the repayment of a plan loan after termination of employment but most employers do not permit it because the checks have to manually processed and transferred to the participants account in the plan. There is also a high probability that the employee will default and the employer will have to treat the loan as a distribution. Also some TPAs do not permit manual check depositing because their systems can accommodate only transfers from a payroll deposit system.

[Earl]

I have seen the default on termination language and the available only to current employees language in loan policies.

I have never understood how it can be ok to deny participants (who happen to be terminated from the sponsor) a feature of the plan (loans). Especially since the majority of the terminees are NHCEs.

I sure understand that it is convenient for everyone concerned, but don't get how it is not a discrimatory practice in operation.

Any rational you have heard?

Thank you.

[QDROphile]

They usually are no longer parties in interest.

[Earl]

yeah, i know... i still don't get it. guess I am just dense...

[QDROphile]

Look at ERISA section 408(B)(1) for one aspect. That does not address your question about discrimination. Perhaps termination falls on the just and the unjust alike, despite your empirical observations. Perhaps payroll deduction is simply an economic condition of the loan. If the program had to suffer the burden of dealing with more cumbersome repayment it would be offered to none.

[mbozek]

The practical reason for limiting loans to active employees is that it is very time consuming and difficult adminstratively to process loan repayments manually especialy if there are larage number of loans. Also there is a high risk of default in non payroll deduction loans which requires that the plan loan be distributed. This all adds up to a lack of interest by the employer in continuing loans to former employees. Also if you allow loans to former employees you have to allow loans to beneficaries and ex spouses who retain the assets in the plan.

[Earl]

The practical reasons are clear. No doubt about it. My question is more of a compliance/non-discrimination issue.

Seems to me, yeah, beneficiaries and ex-spouses would have a right to take a loan under the terms of a loan program that is available on a nondiscriminatory basis.

I understand that inconvenience would lessen loan programs (not a bad thing in my book) but convenient does not make it nondiscriminatory.

I plan to look at the ERISA cite and see if nondiscrimination is "nondiscriminatory availability to Parties in Interest" or is it "nondiscriminatory availability to Plan Participants" or is it something else.

This same issue extends to Hardship distribs. My prototype document allows terminated participants to be excluded from taking Hardship distributions. I know they can get the money, but I am just talking about nondiscriminatory availability.

Thanks -