Transferring Loans

[katieinny]

An EE terminates service with ER A and goes to work for unrelated ER B. He wants to transfer the loan he had under ER A's plan to ER B's plan. ER B's plan does permit transfers prior to meeting the eligibility requirements and does permit loans. Since a loan is an asset of the plan, I'm thinking this could work. Am I missing anything?

[Guest Jennifer Reid]

It only works if ER B's plan will allow a direct rollover of an outstanding loan balance. Due to some administrative complexity, some plans do not allow rollovers of outstanding loans. An alternative solution is for the participant to get the funds to repay the loan either just before or simultaneous with the direct rollover and then take a new loan from ER B's plan.

[Guest scurfman]

some plans require the loan be in a specific format mostly for administrative and payroll issues i.e. frequency of pay periods. interest rate. If the new plan sponsor is in a different state than where the loan was originated, there could be a requirement to re-issue the loan.

One could see were this is desireable especially if the new employer requires eligibility as a criteria for new loans.

Administratively probably not advised.

[Kirk Maldonado]

scurfman:

Wouldn't state laws requiring that the loan be re-issued be preempted by ERISA?

[mbozek]

Kirk: If state laws are preempted what law would govern the terms of the loan since there is no federal contract law? There are cases where fed courts have enforced state contract law to enforce promises employers made under Top Hat plans under the theory that otherwise there would be no way for an employee to enforce the terms of the contract. However, I dont see a need to reissue the loan because states are required to give validity to contracts issued in other states under the full faith and credit clause of the U.S. constitution.