Ability to Repay Plan Loan or limiting loans based on P's salary

[Casey]

Hi,

A client's TPA is advising them to limit/deny plan loans where the repayment amount would exceed a stated percentage of the participant's paycheck. I believe they were recommending 25-30%.

TPA says lot of plan's doing this.

Concern - Is this now the norm, and if so, what is the motivation, legally

- Is there a new piece of guidance indicating this is a requirement?

I can see it as a factor the plan MAY consider, as it is a factor which "would be considered in a normal commercial setting by an entity in the business of making similar types of loans" (DOL reg.) But is it a MUST do?

Thanks in advance for your thoughts!

Casey

[jaemmons]

If it is applied uniformly, disclosed in the SPD and Loan Policy, and does not discriminate in favor of HCE's, I feel the employer would be permitted to apply this restriction. If the employer is adopting this restriction as part of its objective review process for approving loans, I don't see any problem.

[Mike Preston]

Just playing devil's advocate here. How does it possibly not discriminate in favor of HCE's? Wouldn't 25%-30% of an HCE's salary tend to be higher than the same percentage of an NHCE's salary? How does the Plan Administrator demonstrate that the imposition of this percentage limitation is not a defacto mechanism for discriminating as to the loan amount for NHCE's?

[jaemmons]

Mike,

If an employer wants to place a uniform restriction that they feel would prevent financial hardship to the employee and/or possible loan default, don't you think they could have it as part of the loan approval process. I guess from my view point, although I don't draft this type of criteria in my clients loan policies, it boils down to a facts and circumstances demonstration, as it seems, from the original post, to be a uniform objective criteria that the plan administrator wishes to use in its loan approval/denial process.

What do you think?

[Mike Preston]

As I said, I'm just playing devil's advocate here. But you didn't answer my question, did you? How does one demonstrate that the policy itself is not discriminatory? I honestly don't know how I'd go about that if the DOL came in and said something like: "We don't like it, tell us why we should let you keep doing this."

[jaemmons]

What if the employer/plan adminstrator stated that..."If the interest rate must be "reasonable", based upon local lending institution rates, why can't we use similar debt/equity (based upon the payment amount to what they earn) analysis a a bank would review for loan approval? We are using the same objective criteria for what we feel an employee can afford to repay, without causing a future loan default or application for financial hardship."

I guess they could demonstrate that this "cap" has not been violated by any hce which should be able to serve as a good faith application of their current loan policy.

[Mike Preston]

Personally, I think it should be a fine thing to do. I just wonder if anybody at the DOL would have a problem with it. Maybe not.

[E as in ERISA]

The HCE requirement relates primarily to the amount of the loan. The "reasonably equivalent basis" requirement is the one that allows you to consider the creditworthiness and other factors that a commercial lender would.

[Casey]

Hi,

I don't seemed to have framed my question well...

I most want to know if folks think:

- there is a requirement that plans consider the participant's ability to pay/limit the loan based on the ratio of the periodic loan payment amount to the participant's periodic pay check amount; and

- Has anyone run into this? is it common?

I did find the responses interesting for analysis, but if anyone can answer the above I would be most grateful!

thx,

Casey