Loan from 401(k) Plan to participant on Disablility

[buckaroo]

I have a participant who went out on Disability in 1/2006 and is expected to return in 7/2006. She has now called the Plan Sponsor and asked about taking a loan from the 401(k) Plan. If the Sponsor and Trustee believe that she can make repayments to the loan, can she take a loan?

Furthermore, if the Sponsor and Trustee do not believe that she can make repayments to the loan, can they stop her from taking a loan? If so, what documentation should I request from the Sponsor/Trustee?

Any thoughts would be greatly appreciated.

[ERISAnut]

Sorry for the late reply.

There is no hard rule stating that a loan cannot be issued to a participant who is either terminated or laid off. The is purely plan driven and is up to the plan's load policy.

The plan sponsor can alway deny a participant a loan when the plan sponsor has reason to believe that the participant is unable to repay the loan. In fact, the plan sponsor is required to deny the loan. The key to this statement is that any loan denial must be a bona-fide denial based on sound lending criteria. (It cannot be arbitrary).

[QDROphile]

The plan sponsor can't do anything about loans other than establish or amend plan terms. The plan administrator has responsibility for loans and must respect plan terms. If the the plan sponsor is the plan administrator, shame and pity.

[ERISAnut]

The plan sponsor can't do anything about loans other than establish or amend plan terms. The plan administrator has responsibility for loans and must respect plan terms. If the the plan sponsor is the plan administrator, shame and pity.

I didn't catch your confusion until now. Sorry for using the plan sponsor and plan administrator out of context. But, every plan I ever set up, the employer sponsoring the plan was named as the plan administrator.

[QDROphile]

Shame and pity.

[J2D2]

Q - you've stated on more than one occasion your (strong) preference for not making the employer the plan administrator. Care to share your reasons?

[QDROphile]

For an example, look at the thread started by John A on August 9, 2001 relating to domestic relations orders.

[ERISAnut]

Do this.... Have five of your friends who are employed with separate companies request a copy of the SPD for their respective employer's retirement plans. Out of those five, count the ones whose plan administrator is different than the employer.

All B.S. aside, the plan sponsor is already a fiduciary for many reasons, among them are the fact that they hire and appoint other fiduciaries under the plan. So, why would anyone else other than the employer be named as "Plan Administrator".

Thousands, literally thousands, of documents that I have encountered seemed consistent with this mindset. No Shame, No Pity.

Hence the reason for me mistakenly using these these two roles interchangeably.

[SMB]

Just to follow up on ERISnut's comments - and to, hopefully, remind folks what constiututes "reality" for a significant number of us.

I work exclusively with what are now generaly termed "micro plans" and there are - as ERISAnut notes - thousands of them "out there".

In such plans, (1) the employer, (2) plan sponsor, (3) employer, (4) trustee and (5) usualy the participant with the highest account balance is the same individual (i.e., the business' owner).

Doesn't address the original poster's question - just felt compelled to respond for the "little people"!