Weird Participant Loans

[austin3515]

Major Insurance Company does the admin. and investments.

Participants take participant loans. However, the loan comes from the major insurance company and is collaterallized by the investment in the guaranteed interest account.

Therefore, the participant takes the loan from the insurance company and gives collateral rights to his/her interest in their 401(k) account.

This sounds to me like a PT, and an alienation/anti-assignment problem (i.e., grounds for disqualification).

Any recommendations would be greatly appreciated.

[MWeddell]

Maybe someone else can defend this.

I've also seen where the insurance company does charge a loan fee but all interest on the loan is paid to the insurance company (no matter how large the loan is). That raises additional concerns.

[david rigby]

Maybe the major insurance company can offer an interpretation about these questions. Has anybody asked?

[austin3515]

Not surprisingly, they say no problem.

I specifically asked them for technical regferences supporting why it was not a prohibitted transaction. They gave me the loan program. I would need to go oustide of them at this point... Its starting to make me a little nervous!

[mbozek]

A; Borrowing directly from the insurer is a common practice in 403(B) plans where there is no trust and the employee uses the assets under the annuity contract as collateral. The insurer continues to pay the fixed rate of interest guaranteed under the annuity contract while the employee pays 1 or 2 % over the credited rate of interest to the insurer. The loan provision is permitted under state insurance law.

[austin3515]

MBozek-

Thank Goodness someone else has heard of this. This Plan was initially a 403(B) Plan. Any idea if this allowable for a 401(k)? All of the money is still held by the insurance company.

Does this arrangement concern you (i.e., non-403(B) Plan)?

[GBurns]

How does a 403(B) plan get converted to a 401(k) plan?

[austin3515]

They used to have a 403(B) with the same provider. That Plan was terminated and replaced with a 401(k). Sorry for leaving out the details. Did it matter anyway?

[GBurns]

I suspect that to most people it does matter that there are really two (2) different plans that have nothing to do with each other.

It now raises the issue of which plan made the loan and in which plan is the GIC account?

Is it that a 403(B) loan was taken and the 403(B) account used as colatteral? OR Is it that a 403(B) loan was taken and the 401(k) used as colatteral? OR Is it that a 401(k) loan was taken and the 401(k) account used as colatteral?

Did you confuse the 2 or cause the insurance company to misinterpret your questions and that is why you are not getting a satisfactory answer from the insurance company?

Not being accurate leaves the door open for misunderstanding and incorrect answers. That is why most people try to be as accurate as possible in their descriptions and explanations.

[austin3515]

You're being....

Everything I've talked about is in the 401(k). Everything. Two completely and totally separate plans.

If you haven't heard of this situation in a 401(k) plan then let it be.

[mbozek]

Austin: What it the 401(k) arrangement? Is there a trustee and are annuity options offerred to participants under 404©? Or is this an annuity plan which is administered without a trust? Is the plan accepting new contributions or is it frozen for new money? Are the loans arranged theough the plan or does the participant apply for the loan directly from the insurer and use the amount in the annuity contract as collateral against the loan (and the payments are made to the insurance co.) ?

[austin3515]

1) Annuity Plan with no trust

2) Accepting new contributions

3) The loan application goes right to the insurance company, the loan comes from the insurance company, and the participant's account balance is collateral. However, the employer authorizes the loan.

4) Payments are made though payroll withholding, but they are not deposited to the Plan. They are deposited with the insurance company to repay the loan.

[mbozek]

This arrangement is no different that the arrangement that I described for 403(B) annuity plans. The insurance co offers the loan because there is no trust and the payments are made to the Insurer' general account. In some 403(B) plans the provider requires that there the loans be approved by a individual trustee inorder to fulfill the fiduciary provisions on the use of plan assets.

[austin3515]

So if there's not trust, there can be no "traditional" participant loans?

I would think that there must be some sort of prohibitted transaciton exemption for this though, no?

Can you give me any sort of technical site?

Thank you very much!

[GBurns]

You were the person who posted:

"This Plan was initially a 403(B) Plan."

Therefore, it is spurious that you later now try to state :

"Everything I've talked about is in the 401(k). Everything. Two completely and totally separate plans. "

I guess that since you are not sure of what it is you want to write and seem to use words for which you have your own definitions, that is why "everything" is not an all inclusive word and also why my simple question ... "How does a 403(B) plan get converted to a 401(k) plan?" , which was only asked because of your above statement, seems to have thrown you into a tantrum.

Usually posters on these Boards try to keep a civil tongue, however, you seem to easily lean towards vulgarity and abuse whenever you are questioned etc. I do not know if you are embarrassed by my questions, you think that you are above questioning, or by the need for the suggested remedial course, which it now seems might not be broad enough.

[mbozek]

A: See ERISA 408(B) and PTE 77-9.

[austin3515]

Thanks!

Is there anywhere on the internet that one could review the PTE's?

[Guest Laura]

follow up to MBozek's post

MBozek wrote:

"A; Borrowing directly from the insurer is a common practice in 403(B) plans where there is no trust and the employee uses the assets under the annuity contract as collateral. The insurer continues to pay the fixed rate of interest guaranteed under the annuity contract while the employee pays 1 or 2 % over the credited rate of interest to the insurer. The loan provision is permitted under state insurance law."

Observation: some 403(B) plans are subject to Title I of ERISA, and others are not.

Question: Does your post assume that the 403(B) plan is not an ERISA plan (and accordingly ERISA prohibition on assignment doesn't apply)? Would a state insurance law of the nature you describe be "saved" from preemption? If so, this surprises me because the issue of plan loans is arguably a fiduciary issue, which is outside of the scope of preemption.

Second question: Can these Fund Sponsor-direct loans be made to former employees? I recall that loans to former employees is prohibited, yet I can't seem to find authority for the prohibition.