Rollover of Loans

[Guest Suanne]

Situation: Company A has a 401k plan. Company B buys the assets of Company A. Company A employees now work for Company B. Participants in the Company A plan can roll over their account balances to the Company B plan. Is there anything prohibiting the Company B plan from accepting rollovers of loans from the Company A plan?

[QDROphile]

Why can Company A plan participants roll over to Company B plan?

[Guest Suanne]

Because they are now employees of Company B. The Company A Plan has terminated. The Company B Plan is not a successor plan to the Company A plan.

[QDROphile]

Sorry, I missed the asset aquisition fact.

The Company B plan can accept direct rollover of loans from another qualified plan if the plan document provides for it. At least that is what the IRS says. The IRS is wrong, but no one cares.

The Company A plan should provide for in-kind distributions, and many plans provide only for cash distributions.

[Kirk Maldonado]

QDROPhile:

I don't know if the original plan has to provide for in-kind distributions (which is a much bigger issue), but it clearly has to provide for the rollover of loans.

[QDROphile]

Agreed. The distribution or rollover provisions have to allow the distribution or rollover of the loan, either expressly or within some specified asset class other than cash. Also, the plan terms cannot preclude a rollover of the loan.

[401 Chaos]

QDROPhile,

Could you elaborate on why the IRS is wrong in allowing Buyer's plan to accept direct rollover of loans from Seller's plan if the plan documents provide for it. Thanks

[QDROphile]

The direct rollover is still a rollover and not a transfer. Even though the direct rollover looks like a transfer and may in fact not involve having the participant "touch" the assets, it must still follow a distribution. The direct rollover rules are merely an artifice related to withholding. If a loan is distributed, the participant recieves or controls the loan. The direct rollover is not a transaction between the sending plan and the receiving plan, unlike when your mortgage lender sells the loan to another mortgage lender. When a debtor receives the debtor's loan or effectively controls it, the loan is extinguished. The rules on plan loans as applied to particpant loans from their own accounts are an interesting combination of fabrication with lip service to principle. If there is anything left of principle to loans or rollovers, the loan cannot be rolled over directly or indirectly. The IRS has adopted a practical position based on fabrication and ignored principle. It is not the first time.

[Belgarath]

Just curious - do many employers allow for direct rollovers of loans INTO their plans? Seems like a lot of potential hassle. We don't allow it in our documents, but I was curious as to how many do,and if many employers choose to allow it if the document gives them an option not to allow.

[mbozek]

Q: In a direct rollover there should be no receipt of the loan by the participant which constitutes a distribution. The note is an asset which is transferred directly from the the trustee of the current plan to the trustee of the receiving plan, not the participant. The only change in the terms of the note is the name of the owner of the note. This is no different than a direct rollover of cash by distributing a check payable to the receiving plan ( "the Trustee of the XYZ pension plan for the benefit of John Jones") which is permitted under the direct rollover regs. Prior to enactment of direct rollovers, plan loans were permitted as a trustee to trustee transfer of assets. PLR 8910034.

[MoJo]

Belgarath: My experience has been that it is a mixed bag as to whether employers allow it or not. Typically, in the clients I work with, they don't allow a new hire to bring a loan with him/her (unless, of course, they just hired a new senior exec, in which case they quickly review their policy, and may change it...) but they do allow it in cases of M&A activity. Generally, however, my clients realize the value of preserving balances and negotiate for a plan merger to occur, rather than a termination/distribution & rollover to occur. In the case of hte merger, its pretty much the same as any conversion to a new recordkeeper, and invariably the loans require lots of cleanup work....

[Guest JVH]

When I have transferred loans from Plan A to Plan B in an M&A or similar transaction, I have also done the following:

1. Had the participant sign a new salary deferral election because the employer is different. This probably can we worked into # 2 below.

2. Add a provision in the distribution form whereby the participant not only requests a distribution but requests an assignment of the promissory note to the new trustee and agrees to be bound by the terms of the security agreement that provides for the loan offset on default or distribution.

3. Prepare a document for signature by the old trustee whereby he assigns the old notes and security agreements, and whereby the new trustee accepts them.

I like to dot and cross.