Loan from defunct P.C.

[Lori H]

A defunct professional corporation has two participants in the plan. Once is deceased and the beneficiary is unlocatable. The plan has not been funded in years and we have encouraged him to terminate it. The doctor, age 61, is the remaining participant. He already has one outstanding loan from the plan wishes to take a seond loan for $40,000. We have determined that the amount of the loan is o.k. and the document does allow for a second loan. The current loan is being repaid by automatic draft from his personal account. He is disabled and therefore is not drawing income from the p.c. which is the plan sponsor. What would be the problems associated with him taking this loan?

[JanetM]

Does the plan allow inactive participants to take loans?

[Guest mjb]

This transaction makes no sense. Why is the DR maintaining the plan. Why not try to locate the heirs of the deceased DR. There are search firms that will conduct a search specifically for heirs of a missing beneficiary. Check with a trusts and estates lawyer. If no heirs can be located then terminate the plan and forfeit the benefits or see if it can contributed to a state abandoned property fund or an IRA. The disabled DR can take a lump sum and roll it over to an IRA.

[namealreadyinuse]

401(a) plans are superior to IRA for loans and asset protection (in many states), right?

[Guest mjb]

There is no difference in protection from creditors under bkcy law. Most states (NJ,NY) provide creditor protection to IRAs equal to protection for qual plans under ERISA in non bankruptcy claims. A loan does not provide any benefit to an inactive participant because the loan balance is part of his accrued benefit for estate tax purposes and the loan balance is being paid back with after tax dollars to the plan which increase the value of his benefits for tax purposes. I dont what the benefit is in borrowing 50k against your account balance if you eventually pay 60k back to the plan which will be taxed in the future. If he rolled over the distribution to an IRA and drew down on the account balance, his estate would be reduced for estate tax purposes.

[Lori H]

the plan doc is a standardized prototype and does not address loans to inactive participants. we have tried for years to have this doctor termminate the plan. he avoids this option and continues to pay ongoing admin fees to maintain. he has tried to diligently find heirs of the term participant whose account balance is less than $1000. this doctor wants a second loan to pay off a bank loan. he is under the impression that he would like to pay himself interest rather the bank. i explained that he was paying it back with after tax dollars and that he in effect would be taxed twice. he then alluded to the faact that he is paying his first loan back with disability income which is not taxed. i then told him his annual admin fees are around $700 to maintain the plan and any new loan would just extend the life of the plan. he did not mind paying those and basically just wanted to keep the plan available in the event he needed the funds in the future. at this point he is no need for the money

[Lori H]

i can't see any compliance issues with this, but am i missing something? his first loan is current and the plan can be amended to allow for more than one loan. his account balance can accomodate the second loan amount.

[Guest mjb]

Given that he is paying the loan back with non taxable dollars it really doesnt matter if he continues to borrow to pay off another loan (other than that he could get a greater rate of return than the interest he is paying the plan.) Its his money and he can spend how he wants.