Participant choosing to have loan deemed, Issues?

[FundeK]

Can anyone comment on allowing a participant to choose to have their loan deemed? Or, allowing them to choose the tax year it is deemed?

I know there are alot of issues around this, I am trying to compose a comprehensive list.

1. Not following the terms of the loan policy (which most likely will require payroll deduction)

2. Could be viewed as an in-service by the IRS?

3. Deemed loan is still an outstanding loan, and Plan Sponsor has the duty to try to collect on the loan (any cites for this would be helpful)

Also, if you could point me toward an prior posts on this topic. I have tried the search feature and come up empty handed.

Thanks!

[QDROphile]

The plan sponsor has a duty to collect the loan only if the plan sponsor is so ill-advised that the plan sponsor is the fiduciary responsible for such matters. But you are essentially on the mark. The plan cannot let the loan go unpaid at the whim of the borrower. To let the particpant default at whim would suggest that the loan was not treated as a bona fide obligation and that would mean the loan is a prohibited transaction, and the regulations under section 408 of ERISA say so (the specific terms relate to intent that the loan be repaid). Also, the IRS has asserted that bogus loan transactions can disqualify the plan.

[Harwood]

http://benefitslink.com/boards/index.php?s...t=0entry80551

[mbozek]

What does a participant get from defaulting on the loan other than taxation on the balance? Participant cannot have discretion to stop paying loan without PA taking acton to collect the debt. Loans should repaid only through payroll deduction wihch cannot be stopped by employee to avoid hassles of collecting when employee defaults.

[FundeK]

What does a participant get from defaulting on the loan other than taxation on the balance?

They get to drive me crazy!!!

I don't know why, but in the past two weeks I have had at least 3 participants wanting to have their loans deemed in 2004 when they won't even be out of the cure period until 2005.

I am trying to compose a list of risks to the Plan/Plan Sponsor (fiduciary liability, qualfication issues), and a list of items that will impact the participant (taxation, penalty, inability to take another loan) to make sure they are fully aware of all of the consequences prior to the loan being deemed.

Anyone already have list they would like to send me?

[QDROphile]

Perhaps you are asking a different question than we think.

Putting aside how it is that the loan payments stop and whether or not there are problems with that, are you asking if a participant can cause the plan to accelerate date that the loan is treated as taxable? For example, if the plan does not generally treat the loan as taxable until expiration of the longest cure period allowed under the regualtions, can the particpant waive the cure period and have the amount treated as taxable sooner?

I doubt that the plan terms provide for discretion or flexibility. Are you advising about whether or not to amend the plan to provide for participants to cause acceleration?

[Guest Pensions in Paradise]

QDROphile - you stated earlier that "the plan sponsor has a duty to collect the loan only if the plan sponsor is so ill-advised that the plan sponsor is the fiduciary responsible for such matters."

Just out of curiousity, who would you recommend be the fiduciary if not the plan sponsor?

[QDROphile]

If the sponsor is a corporation, the fiduciary (which is almost always the plan administrator) should be a specified individual or group of individuals, such as a committee of the CFO, COO and HR manager. A very large organization might have an independent financial institution. For a sole proprietorship, the practicality is that the sponsor will likely be the fiduciary, but a fiduciary that is or includes someone other than the sole proprietor is a good idea. Even in the worst case (same person is owner and plan administrator), the fiduciary role should be recognized as separate from the sponsor.

[FundeK]

are you asking if a participant can cause the plan to accelerate date that the loan is treated as taxable?

Yes, that is what I am asking.

I doubt that the plan terms provide for discretion or flexibility. Are you advising about whether or not to amend the plan to provide for participants to cause acceleration?

No Way!

I was just wondering if the participant could request this, and what ramifications it would have. It just doesn't seem right to me.

[QDROphile]

I think it boils down to plan terms. I suspect most plans say when loan cure periods expire. When they expire, then the loan is treated as distributed. I would not allow participants to accelerate the deemed distribution unless the plan expressly provided for it. Although I could imagine plan terms that allowed the fiduciaries to decide when to shut the door on cure or take other remedial action, I cannot see allowing borrowers to have that power. If the plan is designed that way, it suggets that there is something wrong with the loan program in the first place. No bona fide lender would give the borrower that power.