Loan fees paid by participant

[Guest Judy S]

Is there a right and wrong way to handle loan fees when they are charged directly to the participant? Most of the providers we work with who prepare amortization schedules for loans include the fee in the loan. Is it also OK to exclude the fee and amortize only the amount the participant receives in cash?

If a participant requests the maximum loan, has a vested account balance of $4000, and the fees, $100, are included in the loan amortization, the participant receives $2000 in cash and pays back $2100. His account balance is $4000 before loan, and $4000 after loan. Is the participant actually paying the fee in this case since he is putting it back in his account?

If the same loan were amortized for $2000 and $2100 were withdrawn from his account, his balance before the loan would be $4000, and after the loan it would be $3900. Is this OK? Assuming the loan is taken from his 401(k) account, does this violate the distribution rules for 401(k) by using the money to pay fees? No 1099-R is issued for this $100 withdrawal-is that OK?

I know you should always look to the document for what to do. Assume the document is a Corbel prototype which has not been amended to provide for individual participant fee payments, but there is an SMM that details to the participants the charges that will be assessed on them directly, including the loan fee of $100. This SMM was prepared based on Corbel's recommendation.

I keep changing my mind on this and would appreciate some input.

[Guest Judy S]

Hello out there. Am I getting no replies because no one knows the answer, or because this question is too stupid to warrant an answer?

[Guest lindamichals]

It has been my experience that you can only add the loan fees to the loan schedule if it falls within the 50% rule. Therefore, if he's vested $4,000, he can take a loan for $2000. If he wants the fees included, he would get a check for $1900 and repay $2000. If he's vested, let's say $4500 and only wants a loan for $2000, then he does not have to include the $100 in his loan schedule, it just comes out of his account balance as an expense.

Linda Michals

[Guest JimD]

Deducting the loan fee from the loan proceeds is a common approach. This will eliminate the problem of exceeding the maximum loan amount which seem to be happening in your examples. I don't think the fee taken from the account is a distribution that must be reported on a 1099R.

[Guest Judy S]

Linda, are you implying that it is up to the participant how it is handled? And Jim, in your example where the participant gets 1/2 the vested balance less the loan fee, is it optional whether the loan fee is amortized? What about the situation where the minimum loan amount is $1000, and the participant's vested balance is $2000?

[Guest lindamichals]

Judy, if no direction in the document or loan program, it just kind of makes sense that if the participant is only vested a certain amount, he only gets to pay back that same vested amount. Loan fees, in my opinion, should not be amortized unless the participant is vested in the amount that includes the fee. Is the loan fee going to the investment company to process the loan or to your company as a fee? We handle loans for our clients and our fee come to us rather than the investment company. Perhaps our situation wouldn't apply to your's. Linda

[Guest hyper]

Judy:

I don't believe you can administer loans like your first example -

"If a participant requests the maximum loan, has a vested account balance of $4000, and the fees, $100, are included in the loan amortization, the participant receives $2000 in cash and pays back $2100. His account balance is $4000 before loan, and $4000 after loan."

In your example, the participant is not repaying a loan of $2,100 (this would exeed the 50% account limit), he or she is repaying $2,000 in loan balance and $100 in fees that were deducted from the account, plus interest on both. I am not aware of anything that permits a participant to reimburse his or her account for fees deducted plus interest. This scenario is very different than paying the fee from the proceeds of the loan.

Another example, same as above except the $100 is paid from the loan proceeds. Loan is for $2,000 and the participant gets a check for $1,900. This is the same as the participant receiving a $2,000 check from the plan and the administrator sending him an invoice for the $100 fee. The repayment will be $2,000 and the administrator gets a fee of $100. Here the participant is still only repaying the amount of the loan, $2,000.

Does this help or hurt ?

[Guest Judy S]

The $100 fee is our company's fee and is coming to us directly from the fund.

It looks like this is maybe an order of operations questions-do you take the fee first and then make the loan or vice versa. If you take the fee first, that reduces the amount available to loan and may prevent someone from getting a loan in a plan that uses the $1000 minimum.

I am getting the impression that you all think the fee should be just that-a fee and the loan is a separate transaction- i.e., no fees should be repaid. Correct?

[Guest lindamichals]

A way to avoid the $1,000 minimum issue would be not to charge the participant's account and collect from him personally. We sometimes ask for the loan fee to accompany the loan app in these situations. We also make indicate on the app an election on how they want the loan fee handled - from plan assets or self-pay.

[Guest JimD]

I was suggesting that one method is for the fee to be taken from the loan proceeds and repaid. If the loan is $1,000 the participant receives cash proceeds of $900 where the fee is $100. Having a participant write a check as Linda suggests is another method. Deducting the fee as you do is another method. A fee taken after the loan is made causes no minimum amount of loan issues. A fee taken prior to the loan will affect the minimum loan calculation in my opinion.