Does loan policy need to be tested for non-discrimination?

[Richard Anderson]

Client wants to limit loans to deferral source only. I think that this is a fairly common practice. Some NHCEs are not deferring, and would therfore not be able to get a loan. Does the availablity of loans need to be tested for non-discrimination under these circumstances? If availability of loans must be tested, can the plan be disaggregated for testing? Test deferral, match, nonelective sepearately?

[Alf]

Limitations on loans should be tested, but your facts should pass automatically because all employees are eligible for deferrals whether or not they choose to make them, so loans are actually available to all.

[Richard Anderson]

Bleow is Section 4975(d)(1)(A)-(E). In order to not be a prohibited transaction all 5 conditions must be met. In the context of allowing loans on deferrals only, does anyone have a problem with either (A) or (B)?

(d) Exemptions

Except as provided in subsection (f)(6), the prohibitions provided in subsection © shall not apply to--

(1) any loan made by the plan to a disqualified person who is a participant or beneficiary of the plan if such loan--

(A) is available to all such participants or beneficiaries

on a reasonably equivalent basis,

(B) is not made available to highly compensated employees (within the meaning of section 414(q)) in an amount greater than the amount made available to other employees,

© is made in accordance with specific provisions regarding such loans set forth in the plan,

(D) bears a reasonable rate of interest, and

(E) is adequately secured;

Question 1. As for (A); is it a reasonably equivalent basis if most or all HCEs are deferring, but many of the NHCEs are not?

Question 2. Would loans be available in an "amount greater" because HCEs deferral accounts are greater than NHCEs deferral accounts? Assume that for all accounts (deferral and profit sharing) added together, the amount disparity between HCEs and NHCEs is less than when considering deferral accounts alone.

I am personally OK with limiting loans to the deferral account only, but I'm having trouble convincing another person in the office. Does anyone see any problems with limiting loans to deferrals only?

[GBurns]

Deferrals belong to the employee but so do all vested amounts regardless of original source. Would there not be a problem in restricting certain but not all employees from acessing vested amounts?