Participant Loans during a Plan Administrator Change

[Dan]

We desire all of the original loan documentation. This should include loan amount, rate, length, payment amount, etc. We certainly need to receive loan amortization schedules as well as current status of loan within the context of amortization schedule.

I am unaware of any reason to demand payment of outstanding loan balances because of plan recordkeeping or investment provider changes.

Be sure to monitor payments during transition. If payments are made and credited properly, the participants should have no impact whatsoever.

Participants must make loan payments promptly, even if employer does not remit them promptly to investment provider. And payments should be sent as soon as possible after receipt. However, loan payments do not have same statuatory time standards that appply to deferral contributions. Good Luck.

[Guest Kennedy]

A company is unhappy with the administration and investment providers for their 401(K)plan. The company locates a Trust that will accept transfer of the plan assets and provide investment and administrative services. The 401(k) plan has permitted loans and will continue to do so. I don't believe the existing loans must be paid off, but what is involved in moving between the two administrators? What type of documentation is likely to be required? Will the change impact the participants with loans negatively? Any citations would be appreciated.

[Fredman]

I agree with the above and would add that if there is a change of the plan's trustee, the old trustee should assign the loan note to the new trustee.

[Guest Kennedy]

How about this twist-The Company will be signing on under a Master Plan and Trust Agreement which does not permit mortgage loans and has a defined interest rate of prime plus one. What happens to the participants who have mortgage loans? What about any variance in existing loan interest rates?

[Alan Simpson]

Since you are going to a Master Plan and Trust Agreement I would suggest an amendment to the Plan/Agreement/Loan Policy allowing those mortgage loans existing at the time of adoption to be grandfathered in. If you do not have an early call provision in the promissory note I don't believe that you would be able to require the participant(s) to pay back the loan without some sort of default event occurring first.

As far as the interest rate goes, what would happen to a fixed rate loan you made after conversion if the prime rate changes - you would not adjust the loan rate. Therefore, the interest rate of the loans should remain as stated in the loan agreement/promissory note.