The Soldiers' and Sailors' Civil Relief Act – applying a rate higher

[Guest Do]

The Soldiers' and Sailors' Civil Relief Act requires that 401(k) loans of participants who are activated have an interest rate that is no more than 6% while they are on active duty. I read some articles that say an interest rate in excess of 6% is ok if the participant's military service does not "materially affect" the participants ability to pay the higher interest rate.

The PWBA website says in order to apply the higher interest rate, a plan fiduciary has to petition the court. I've talked to a few friends at other companies and they are letting the participant decide whether to have the 6% rate or the current rate apply while they are on active duty. They are not petitioning the court.

Is anyone else just letting participants choose? Has anyone petitioned the court for permission to use a higher interest rate

[Guest Bud]

I think 6% is mandatory. The plan administer should determine whether active duty will materially affect the participant's ability to pay the higher rate.

If the plan admin determines that active duty will affect the participant's ability, then 6% has to be applied. If the plan admin determines that active duty will not affect the participant's, then the plan admin has to get court approval to apply the higher rate. Without court approval, 6% has to apply.

We are automatically lower interest rates to 6% for all activated employees. We are not considering whether active duty will affect an employee's ability to pay the higher rate because we are not going to petition the court.

I'm also curious to know what others are doing or advising their clients. I wonder if the plan administer has a fiduciary duty to petition the court because it would be in the best interest of the participant?

[mbozek]

In the absence of a ct determination the rate cannot exceed 6%. The participant can always require the plan to return any interest in excess of 6%. I guess the plan adm are gambling that the participants will not demand a refund or seek other legal remedies.

[E as in ERISA]

Remember that ERISA has a specific requirement regarding interest rates: The loans must bear a "reasonable rate of interest," which is defined as "a return commensurate with the interest rates charged by persons in the business of lending money for loans which would be made under similar circumstances." The Soldiers and Sailors act applies to all lenders. So I think that the the fact that most lenders would be charging 6% during military service imposes a greater responsibility on the plan to use a maximum 6% interest rate.

Participants periodically ask that they be charged more than the going rate on their plan loans (so that they can defer more). But plans are not allowed to do that because of the market interest rate requirement.

[RCK]

Our loan policy says that the participant can ask for a suspension of payments, or a reduction of the interest rate to 6%, or both. But neither takes place without their request.

Policy was blessed by ERISA counsel from prestiguous local law firm.

RCK

[MGB]

If you read the actual law, you get the opposite result of the DOL's interpretation and there is a very good argument that you do not need to go to court. Needing to go to court is only from the DOL reversing who has the burden of proof from what the law says. Some law firms may be relying on the law to be more powerful than the the DOL interpretation. Note that it is only an interpretation (soft guidance) by the DOL, not a regulatory dictate.

[E as in ERISA]

Yes. But my point is that you can't read the Soldiers and Sailors Act alone. You have to read it jointly with the regulatory requirement under ERISA that provides that the plan must charge the "market" rate. Other lenders are not subject to the restriction that they lend only at the market rate, so they may continue to charge the higher rate until the borrower asks for a reduction. But a plan must also satisfy the ERISA requirement.

[E as in ERISA]

One always has to decide whether you want to follow the regulators' views (which may be the more conservative position but will likely avoid litigation) or whether you are willing to challenge regulators views when you feel they exceed statutory authority (which may provide more options but also includes risk of incurring litigation costs). You will sometimes find differences between law firms' and other consultants' advice based on the fact that the law firms are often more willing to challenge regulators' positions that go beyond the law, and others are trying to avoid litigation. Your choice of action sometimes depends on what the risk of litigation is, what the worst case scenario would be, and how willing you would be to pursue the challenge.

[Kirk Maldonado]

Isn't this discussion somewhat moot, given the current interest rates?

Having entered into some personal loan arrangements recently, I find it hard to believe that a lender would charge more than 6% for a comparable loan. Remember that a comparable loan would involve a situation where you pledged an account held in the participant's name at the bank for the loan, and the account held money at least equal to the amount of the loan.

[MGB]

Kirk,

The issue is with outstanding loans. You could have a loan that was issued a couple of years ago at a rate much higher than 6% (I had one from my 401(k) that I just paid back that was over 8%). Now that the person gets called up, that loan must decrease its interest rate.

[Guest Bud]

Does anyone think the plan admin has a fiduciary duty to petition the court when the participant wants to pay the higher rate and the plan admin thinks he or she can pay it?

[mbozek]

What is the relevance of ERISA to the max interest rate that can be charged since the ERISA does not preempt other fed laws such as the SSRA?

[Guest Bud]

The plan administrator petitions the court, so it must be the plan administrator's decision to petition the court. A higher interest rate may be in the best interest of the participant because the participant will be able to put more into his account.

[mbozek]

That may be true from a benefits perspective but most persons called to active duty make less than their civilian jobs and have less disposable income. The purpose of the SSRA is to prevent financial hardship to military personnel.

[Guest Bud]

That's true. Most make less while on active duty; however, many employers (like mine) provide salary continuation. In addition, even if an activated employee doesn't have salary continuation, he or she may want to accrue interest at higher rate so that, when he or she returns and resumes payments, he or she can put more into his or her account.

Many employees want the higher interest rate for reason. If an employee wants that higher interest rate and the plan administrator believes higher payment amounts are in the best interests of the employee, should the plan administrator petition the court for a higher interest rate?

[Guest Do]

Thanks everyone. It looks like a higher rate will require approval from the court (and RCK's ERISA counsel from prestiguous local law firm is wrong - sorry RCK's ERISA counsel comment cracked me up). Bud asks a good question though about a fiduciary duty petition the court. I hope this discussion doesn't die now.