Can a loan be rolled over?

[Santo Gold]

Several participants who work for company A have outstanding loans in the Company A's 401(k) plan, Plan A.

2 employees are leaving company A (amicable) to form their own company, Company B and a few of the other employees will be joining company B as well. Company B will be completely separate from Company A, no controlled group. Company plans to adopt a new 401(k) plan, Plan B immediately.

Some of the partiicpant in Plan A have plan loans. Can Plan B be written to allow for rollovers of loans from Plan A? Can Plan B allow such a transaction to occur? The desired result is that most of the Company B employees wish to rollover their Plan A account balances to Plan B. They'd also like to avoid taxation on the remaining loan balance they have in Plan A.

Thanks

[E as in ERISA]

Yes. But it can be difficult to do administratively. There can be time lag between last payroll deduction payment to old plan and transfer into new plan. Especially with new company. Old plan could end up offsetting in the meanwhile.

[Guest mjb]

The loan rollover should be effectuated upon the employee's termination from employment and the employee should commence salary withholding shortly after commencing employment even if the loan account has not been transferred which will avoid a default (and since the period for paying off the loan cannot be extended). The transferring plan cannot default the loan for non payment due to the plan's failure to transfer the loan to the new plan since the loan is being transferred as a direct roll over and will not be distributed.

[Santo Gold]

Do you think that Plan A's Loan Procedures would have to specifically allow for this or are loan rollovers always allowed? Also, would Plan A simply report the entire distributioin ("cash" plus the outstanding loan) as a rollover out of the plan?

[namealreadyinuse]

A's distribution AND loan procedures have to permit it. It will technically be an in-kind distribution of property (the loan note is really the asset being distributed) and the loan procedures can't automatically default on a termination/distribution. Not rocket science, but you definitely have to have cooperation from A because I'll bet that most plans do not permit this.

[Guest mjb]

I dont think the transferring plan needs specific language to permit a rollover of an in kind distribution since reg. 1.401(a)(31)-1 Q16 expressly allows plan administrator to transfer the loan note in a direct rollover to another q plan. Q15 notes that a direct rollover is a distribution and rollover of the eligible rollover distribution and not a transfer of assets and liabilities. (The note will be distributed whether or not it is rolled over.) The problem with rolling over loan notes occurs from the receiving plan which does not have to accept a rollover of any distribution.

[namealreadyinuse]

I respectfully disagree. PAs can't have discretion about form of payment. A note is a non-cash property distribution. The plan probably says all distributions are in cash lump sum, so that would end the discussion imho. However, if the plan is silent on form of distribution and none of the 402(f) notices, election forms, etc. mention property distribution, it would not be permissable for the PA to allow this participant to take non-cash property when no one else got the chance.

[Guest mjb]

The IRS regs specifically state that a loan note can be transferrerd as part of a direct rollover which is a elibible rolllover distribution. The regs require that a participant must be allowed to make a direct rollover of a distribution. Absent a provision in the plan which prohibits the rollover of plan loans, the loan note can be rolled over as part of the eligible rollover distribution since a lump sum distribution of the participant's interest in the plan will include the distrbution of the loan note. There is no need to refer to property distibutions in the notices since the loan note is part of the eligible rollover distribution of the particiant's account (Or prepare an addendum that includes the loan note for the purpose of a rollover.)

Why are you so concerned with the need for specific authority in the plan to transfer the note since the IRS considers the loan note to be part of the eligible rollover distribution and the Plan Administrator has discretion to interpret plan terms and can allow all partaicpants to rollover loans. The receiving plan has the administrative difficulties of continuing the loan and will usually decline to accept a rollover of the loan note.

[namealreadyinuse]

Why are you so concerned with the need for specific authority in the plan to transfer the note since the IRS considers the loan note to be part of the eligible rollover distribution and the Plan Administrator has discretion to interpret plan terms and can allow all partaicpants to rollover loans.

The note has to be distributable from the plan before it can be an ERD. Many (most?) plans do not permit the distribiton of non-cash assets such as notes.