Participant used loan money for a different reason that originally stated.

[Guest tracys]

Client allows loans for the standard "hardship" reasons. Participant applies for a loan for the reason of "preventing eviction" and gives her employer a letter from the landlord stating that $xxx is due to prevent eviction. The employer issues loan for $xxx.

Subsequently, the employer receives a garnishment order for payment to the landlord in the same $xxx amount. Participant confesses that she did not give the loan proceeds to the landlord but did use the money to acquire a new residence - which would be another acceptable reason.

Any thoughts on what to do with this? Have the participant sign off on modified paperwork? Or, if the employer received adequate supporting documentation for the loan when originally issued, does this type of subsequent info have to be considered at all?

This client likes to play very much by the book... not to imply that the rest don't

[Harwood]

Participant can use the money for whatever they choose. They can even come back the next month and apply for a distribution due to the same hardship because they didn't spend the first check to relieve their hardship. I call this the "dirty little secret" of hardship distributions.

I know of nothing that requires the Plan Sponsor monitor what a Participant does with any distribution.

All you can do is limit the number of hardships taken per year.

[QDROphile]

I don't think the issue is the hardship distribution rules. The issue is plan terms and the need to follow them. The participant cannot use the money however the participant chooses. It may not be very smart, but the plan terms limit loans to specific purposes. Through the dissembling, or change of mind, of the participant, the loan proceeds were not used for the stated purpose. While the issues are all very interesting, I can't get too worked up about it because the loan proceeds were in fact used for a permissible pupose. The chances of qualfication problems are extremely remote. I suggest documenting the actual use of proceeds to show that the ultimate use was not contrary to plan terms. Consider changing plan terms. Loan administration is bad enough without complications arising out of an unfortunate attempt to compromise and blend different concepts and rules.

The more interesting question going forward how the lying employee will be treated in the future.

[Harwood]

Loans and hardships are based upon the circumstances when the application is made [and up to the date the check is cut]. If the terms of the plan were met then, I don't think subsequent events should worry the sponsor or are even any business of the Sponsor.

Does the loan become immediately reported as taxable because of changed circumstances after it was issued? Do the people who got a 15 year loan have to give it back because the deal to buy a new house fell through?

[FundeK]

I agree with Harwood. The Plan Sponsor followed the terms of the plan when issuing the loan. What the participant did with the proceeds is their own business.

[QDROphile]

So if a particpant applies for a loan for purchase of a house, the plan administrator only asks to see some documentation that a house purchase is underway and then the particpant gets the loan?

If that is the administrative standard for compliance with plan document terms, I think the plan had better be amended to remove the uncertainty about what is required under the express restrictions. If the plan terms are serious in their limitation of purpose and use, I think the administrator should be equally serious about making sure the the restrictions are honored. I don't think it is a good idea to have the restrictions, but if they are there, they need to be implemented with some degree of diligence. The problem is knowing how far to go and the right answer depends on the circumstances. For example, in the house purchase, one might expect the loan proceeds to be delivered to the closing escrow. That will prevent some puzzlement about the shiny new car in the employee parking lot the next week.

[FundeK]

So, are you saying that the Plan Sponsor should follow up with each person who takes a loan to verify they are using the funds how they said they are using them?

If, at the time the loan is approved, the Plan Sponsor has all of the supporting documentation and approves the loan, there is no reason they have to follow up to see how they are used. They have approved the loan based on the documenation provided.

If, at the time the loan is being issued, the Plan Sponsor knows the proceeds will not be used for the purpose intended, then they should definitely deny the loan, thus honoring the restrictions set forth in the plan.

I think the administrator should be equally serious about making sure the the restrictions are honored. I don't think it is a good idea to have the restrictions, but if they are there, they need to be implemented with some degree of diligence.

I think in this case, the Sponsor was diligent in making sure the restrictions were honored. They approved the loan based on the restricitions in the plan. How do you feel they are not honoring the restrictions in the plan?

[FundeK]

Does this thread help at all?

http://benefitslink.com/boards/index.php?s...127&hl=hardship

[WDIK]

Does this thread help at all?

The current thread is with regard to loans available for hardship reasons.

The other thread discusses hardship distributions.

[Mike Preston]

There is no DUTY of the plan administrator beyond the date that the check is cut. However, if the participant comes back the next month and asks for something that is inconsistent with the prior request, the plan administrator has a duty to not proceed. This is very similar to the fake QDRO situation somewhere in the Southeast a while back. It was ok for a plan to process the first few, but once it became clear that something was rotten in Denmark (Georgia?), the plan administrator had a duty to do something other than just process the paperwork as if it had no knowledge that something was amiss. Exactly what to do is a much more interesting problem. For that, they have ERISA attorneys!

[QDROphile]

I did not say that any standard was violated by the loan to prevent the eviction. I said that plan provisions that depend on the proposed use of the proceeds create a difficult problem because the duty of the administrator to follow the plan terms is not spelled out. I don't think one can simply conclude that a proposal that is OK on its face allows the adminstrator to cut the check and do nothing more. I did not say that the administrator had ongoing monitoring responsibility, but I can certainly argue that cutting the check is not necessarily enough under various circumstnaces.

I don't think that hardship or loan rules provide the answer because the issue is created by plan provisions. The plan provisions are not simply implementing the hardship or loan rules that are found in other authority. The question is, what does the plan require because of its extraordinary terms? Perhaps the plan says to make loans under the same standards as for hardship distributions. If so, then the hardship distribution rules would define the responsibilities.

Now consider what happens when the administrator finds out about the lie. Is that a loan default? Is the use of proceeds of the loan one of the loan terms? If not, has the administrator failed to administer the plan terms adequately?

In the case of the switch from rent payments to house purchase, I think the administrator would not have to take remedial action, such as exercis default rights, but the justification is that the plan terms have not been violated. The administrator should document the facts that justify the action or inaction of the administrator under the circumstances.

[Mike Preston]

I don't believe that the administrator has any responsibility whatsoever (at all? ;-)) after the check is cut. If there is any responsibility at all it is before the check is cut. The course of action taken (cutting the check) is of course subject to the normal rules on when or when not to do something and documenting that is a fine thing to do. But once that money is out the door, there is nothing left to do. Ever. One does not and can not default the loan no matter what the participant actually does with the proceeds.

Oh, I suppose if you have a loan policy that says the plan administrator will check up on you and default your loan if you spend it on something other than what the loan was justified for you would have to follow the loan policy. I'd let the loan policy drafter do the work required, though, as the responsibility for such a silly (stong enough?) policy should be borne by the drafter.