Modification of loan repayment terms

[Guest JDL]

Hello -

I'm been looking into whether a 401(k) plan that provides for plan loans can be amended to change the repayment terms of a loan mid-stream (i.e., a participant can't continue to repay post-termination and would be required to pay the outstanding amount immediately). Up to his point, the plan has allowed participants to continue to pay the loan back under the loan's terms, including post-termination participants. However, the plan would like to require former participants to pay back their loans immediately. I know that plan loans are not protected benefits under 411(d)(6), however, I'm not sure whether a plan can be amended to modify the repayment terms of a loan that is currently outstanding. I haven't been able to find any guidance on this. Any suggestions? Thanks for any advice.

[david rigby]

Would any existing loan already include an agreement between the parties on how it is repaid? It seems unlikely that one party can unilaterally change that agreement.

[Guest JDL]

Yes, I believe the existing loans do have a repayment agreement (i.e., I believe the participants could elect upon terminaiton to continue to repay the loan until it is satisfied or to be treated as receiving a taxable distribution). Here, I believe the plan sponsor would now like to unilaterally change the agreement mid-stream with regards to terminated participants to either require full repayment of the outstanding loans, or to treat the loans as taxable distributions. I too question whether the sponsor can unilaterally do this, but I have not found anything saying it cannot be done (although I'm still looking). Thanks for any input.

[E as in ERISA]

The way I've normally seen it done is to say that all new loans after xx-xx-xx must be repaid at termination.

[rcline46]

A loan agreement is a contract under STATE law, not ERISA. As such it must follow contract law. And I don't know anyplace that allows unilateral changes to a contract.

I don't think you can change any existing loan agreements, on loan agreements from date of change to progam forward.

[Guest JDL]

rcline46 - That sounds reasonable. By chance, have you found a source of authority (IRS, DOL, or case law) that states that the terms of a plan loan agreement are governed under state law and not ERISA?

Once again, thanks to all who have replied. Your suggestions have been very helpful.