Loans

[Guest lindamichals]

A terminated participant is requesting two things:

1) he wants to roll money from a previous plan into the company he just terminated from. The document says "employees" are allowed to roll $$ into the plan, so the employer can tell him no on this one, but..............

2) he also wants to take a loan

The loan program states loan payments are to be repaid via payroll deduction. Is the plan obligated to allow for this loan? Can the employer technically "get out of" allowing for the loan based on this?

Many of my plan sponsors cringe when terminated participants want to even continue making their loan payments, they feel they should no longer have to administer their loans :angry: , so I usually take over for them to keep them happy! But this situation is different, he want to initiate the loan as a terminated participant.

As always, your comments are greatly appreciated!

Linda

[mbozek]

Most plan documents do not allow allow a terminated employee to apply for a loan. If the plan document/loan agreement requires that loans be paid back by salary deduction then a terminated participant cannot take out a loan.

[GBurns]

mbozek's answer is as good a response as you can get, but your wording intrigues me. What do you mean by "so I usually take over for them to keep them happy!"? How do you do this and what do you do?

[R. Butler]

Many of my plan sponsors cringe when terminated participants want to even continue making their loan payments, they feel they should no longer have to administer their loans 

This issue can be avoided. As mbozek points out if loan repayments are required via payroll deduction than a terminated employee couldn't have a loan. You probably have a default when the person terminates because there is no payroll deduction. If you want to remove all ambiguity simply state in the loan document (and the loan agreements) that payment will be acclerated upon termination of employment.

[Guest asire2002]

In order for a participant loan program to be exempt from the prohibited transaction rules, loans must be available to persons who are "parties in interest". Generally speaking, when an employee terminates employment, he/she ceases to be a party in interest and so can be prohibited from taking a loan if the plan document and loan policy are written that way. However, there may be instances in which an ex-employee continues to be a party in interest, for example, if the employee goes to work for a company that is a service provider to the plan. If the former employee is a party in interest, a loan must be granted to him/her even if the loan program generally requires repayment by payroll deduction. In fact, the loan policy should require repayment by payroll deduction only from active employees, not inactive parties in interest. I believe there is an advisory opinion on this point.

[mbozek]

ERISA 408(b)(1) provides that a PT will not apply to loans offerred to parties in interest who are participants or beneficaries if they available on a reasonably equivalent basis to all participants and beneficiaries. A provision that the plan must offer/continue loans to parties in interest with conditions that are more favorable then loans to other participants, e.g., allow a party in interest to continue to pay back a loan after termination of employment could result in the loan be considered to be a PT. The reasonably equivalent basis requirement is authority to restrict loans to participants who will pay the loans back by payroll deduction and avoids having to make loans available to beneficaries who are not employees.

[Guest asire2002]

Mbozek, have you had an opportunity to read ERISA Opinion Letter 89-30A, which states "Consistent with the principles discussed in the supplementary information accompanying the Federal Register publication of §2550.408b-1, a loan program which excludes all but active employees from participation would not be considered to be providing loans on a reasonably equivalent basis to all participants and beneficiaries who are parties in interest."?

[Belgarath]

I agree with asire2002. Although the circumstances where former employees are considered "parties in interest" are probably rare, it does occur. And there's a special rule under 1.401(a)(4)-10© to help employers avoid a qualification defect on the nondiscrimination testing of a loan feature by allowing a plan, as the DOL regs permit, to offer loans to former employees who are parties in interest, and treat them as employees for this purpose, but not to offer loans to other terminated participants. And I agree that a plan may not indirectly exclude former employee-participants by requiring payroll deduction as the only repayment method.

I guess I've just been lucky - I've never actually seen a request for a loan by a former employee.

[R. Butler]

I also agree with asire2002, but as asire points out in the initial post this genrally won't be an issue because terminated employees rarely will continue to be a party in interest.

[mbozek]

A loan program which limits loans to those participants who can make repayments by salary deduction would not be inconsistent with Dol Opinon 89-30A because former employees would be eligible for loans if they were receiving any other form of compensation from the employer, e.g., nonqualfied deferred compensation or self employment income. Former employees who are parties in interest will be either directors or 50% owners who will be most likely to recieve compensation from the employer after terminaton from service.

[J2D2]

"Mbozek, have you had an opportunity to read ERISA Opinion Letter 89-30A, which states "Consistent with the principles discussed in the supplementary information accompanying the Federal Register publication of §2550.408b-1, a loan program which excludes all but active employees from participation would not be considered to be providing loans on a reasonably equivalent basis to all participants and beneficiaries who are parties in interest."?"

Reviving this topic to see if anyone has more experience with this issue over the ensuing 5 years. Specifically, I'd be interested to know if DOL has, on audit or otherwise, challenged a plan provision that restricted loans to active employees.

Thanks.

[K2retire]

In order for a participant loan program to be exempt from the prohibited transaction rules, loans must be available to persons who are "parties in interest". Generally speaking, when an employee terminates employment, he/she ceases to be a party in interest and so can be prohibited from taking a loan if the plan document and loan policy are written that way. However, there may be instances in which an ex-employee continues to be a party in interest, for example, if the employee goes to work for a company that is a service provider to the plan. If the former employee is a party in interest, a loan must be granted to him/her even if the loan program generally requires repayment by payroll deduction. In fact, the loan policy should require repayment by payroll deduction only from active employees, not inactive parties in interest. I believe there is an advisory opinion on this point.

So you are saying that a participant with an account balance is no longer a party in interest when he or she terminates employment? I always understood that anyone with money in the plan was a party in interest.