Plan Loans under a terminating plan.

[katieinny]

An employer is planning on terminating his DC plan prior to the sale of his business to another company. He's concerned that many of the participants have outstanding plan loans that they would not be able to repay on short notice.

The purchasing company offers a similar type of DC plan. If the purchaser's plan permits, can the employees roll their loans over to the purchaser's plan to avoid having taxable distributions?

[Belgarath]

Yes.

[Belgarath]

P.S. - if you want a cite, it is 1.401(a)(31)-1, Q&A-16.

[katieinny]

That's exactly what I was looking for. Thank you.

[E as in ERISA]

You should determine in advance exactly how you are going to do this logistically. Loan payments to the old plan will probably stop at the time of sale. But the transfer of assets may occur much later. And default may occur in the meantime.

[mbozek]

K: Cant the new employer avoid the default issue by commencing to withold the loan payments from payroll as soon as the employees have been transferred the same as withholding of salary reduction on the theory that the loan obligations are being transferred under the terms of the acquisition so that there will be no default in loan payments? I dont see any need to wait until assets are transferred before commencing loan payments if the acquisiton documents provide for the transfer of all plan assets to the acquiring employer's plan.

[Kirk Maldonado]

Belgarath:

Are you sure that 1.401(a)(31)-1, Q&A-16 is the right cite? Here's what it provides:

Q-16. Must a direct rollover option be provided for an eligible rollover distribution from a qualified plan distributed annuity contract?

A-16. Yes. If any amount to be distributed under a qualified plan distributed annuity contract is an eligible rollover distribution (in accordance with §1.402©-2), Q&A-10 the annuity contract must satisfy section 401(a)(31) in the same manner as a qualified plan under section 401(a). Section 1.402©-2, Q&A-10 defines a qualified plan distributed annuity contract as an annuity contract purchased for a participant, and distributed to the participant, by a qualified plan. In the case of a qualified plan distributed annuity contract, the payor under the contract is treated as the plan administrator. See §31.3405©-1, Q&A-13 of this chapter concerning the application of mandatory 20-percent withholding requirements to distributions from a qualified plan distributed annuity contract.

[Belgarath]

Kirk - we must have different sources. Mine is from CCH's 2004 Pension and Employee Benefits Code ERISA Regulations, Volume 1. In that volume, the question you cite is listed as Q&A 17, not 16. Also, following is an excerpt from the GPO access website, which also lists the Q&A I cites as 16. What source are you using? Thanks.

[Title 26, Volume 5][Revised as of April 1, 2002]From the U.S. Government Printing Office via GPO Access[CITE: 26CFR1.401(a)(31)-1][Page 218-225]                        TITLE 26--INTERNAL REVENUE     CHAPTER I--INTERNAL REVENUE SERVICE, DEPARTMENT OF THE TREASURY                                (CONTINUED) DEFERRED COMPENSATION, ETC.--Table of Contents Sec. 1.401(a)(31)-1  Requirement to offer direct rollover of eligible rollover distributions; questions and answers.    The following questions and answers relate to the qualification requirement imposed by section 401(a)(31) of the Internal Revenue Code of 1986, pertaining to the direct rollover option for eligible rollover distributions from pension, profit-sharing, and stock bonus plans. Section 401(a)(31) was added by section 522(a) of the Unemployment Compensation Amendments of 1992, Public Law 102-318, 106 Stat. 290 (UCA). For additional UCA guidance under sections 402©, 402(f), 403(b)(8) and (10), and 3405©, see Secs. 1.402©-2, 1.402(f)-1, and 1.403(b)-2, and Sec. 31.3405©-1 of this chapter, respectively.                            List of Questions    Q-1: What are the direct rollover requirements under section 401(a)(31)?    Q-2: Does section 401(a)(31) require that a qualified plan permit a direct rollover to be made to a qualified trust that is not part of a defined contribution plan?    Q-3: What is a direct rollover that satisfies section 401(a)(31), and how is it accomplished?    Q-4: Is providing a distributee with a check for delivery to an eligible retirement plan a reasonable means of accomplishing a direct rollover?    Q-5: Is an eligible rollover distribution that is paid to an eligible retirement plan in a direct rollover currently includible in gross income or subject to 20-percent withholding?    Q-6: What procedures may a plan administrator prescribe for electing a direct rollover, and what information may the plan administrator require a distributee to provide when electing a direct rollover?    Q-7: May the plan administrator treat a distributee as having made an election under a default procedure where the distributee does not affirmatively elect to make or not make a direct rollover within a certain time period?    Q-8: May the plan administrator establish a deadline after which the distributee may not revoke an election to make or not make a direct rollover?    Q-9: Must the plan administrator permit a distributee to elect to have a portion of an eligible rollover distribution paid to an eligible retirement plan in a direct rollover and to have the remainder of that distribution paid to the distributee?    Q-10: Must the plan administrator allow a distributee to divide an eligible rollover distribution into two or more separate distributions to be paid in direct rollovers to two or more eligible retirement plans?    Q-11: Will a plan satisfy section 401(a)(31) if the plan administrator does not permit a distributee to elect a direct rollover if his or her eligible rollover distributions during a year are reasonably expected to total less than $200?    Q-12: Is a plan administrator permitted to treat a distributee's election to make or not make a direct rollover with respect to one payment in a series of periodic payments as applying to all subsequent payments in the series?    Q-13: Is the eligible retirement plan designated by a distributee to receive a direct[[Page 219]]rollover distribution required to accept the distribution?    Q-14. If a plan accepts an invalid rollover contribution, whether or not as a direct rollover, how will the contribution be treated for purposes of applying the qualification requirements of section 401(a) or 403(a) to the plan?    Q-15: For purposes of applying the plan qualification requirements 

of section 401(a), is an eligible rollover distribution that is paid to

an eligible retirement plan in a direct rollover a distribution and

rollover or is it a transfer of assets and liabilities?

Q-16: Must a direct rollover option be provided for an eligible

rollover distribution that is in the form of a plan loan offset amount?

[E as in ERISA]

I'm not talking about legal issues -- I'm talking about practical issues. In order for the new employer's payroll system to take loan payments out, it needs the legal paperwork to authorize it and it needs the necessary loan information from the old plan and it needs that information input into the payroll system. I'm not even saying that you can't do that. I said that you have to determine the logistics in advance -- because it won't happen naturally.