Loan - Audit issue?

[Guest bueler]

Quick question - Our standardized document states that if a loan is taken it can be for hardship or financial necessity. Would an auditor find any fault with this if an individual does not adhere to these guidelines? (I also need more information on how broad "Financial necessity" is?)

[Jon Chambers]

The answer may be obvious if I restate the question slightly: Does an auditor care whether or not we follow the terms of our plan document? Of course they do. You need to follow the terms of your plan. What may be confusing you is that there is no legal requirement to have a hardship rule for loan eligibility. But since you have put such a rule in your plan, you need to follow it. Your "out" may be that you don't yet have a good definition of "financial necessity". If you can develop a reasonable policy that meets the standards of loans that have already been approved, and you rigorously follow that policy in the future, you are probably ok.

[Guest bueler]

I appreciate your response. In regards to the auditor caring, I understand. The "Financial Necessity" is very broad. I could say that I need a loan to buy a horse? Is it up to the document or the plan sponsor to determine what is a financial necessity? Thanks.

[FundeK]

If the document doesn't contain specific language defining "financial necessity", it is up to the plan sponsor to create their own policy defining it, and adhere to it as Jon Chambers stated.