Participant Loan Upon Plan Termination

[Randy Watson]

Our loan policy nor the plan states what will happen to a participant loan upon termination of the plan. Any recommendations on what can/should be done?

[namealreadyinuse]

Our loan policy nor the plan states what will happen to a participant loan upon termination of the plan. Any recommendations on what can/should be done?

Also check the loan documents (note) in addition to plan / policy.

How terminated? If you are making final distribution you should offset the loans against distributions, but I am assuming that you are just declaring a proposed date of termination and that dists won't happen for a while. Then you have to continue to administer the loans to prevent them from defaulting, don't you?

[stephen]

I have seen plans who allowed for the former employee continue making loan repayments. However, generally loan provisions require for the loan payments to be paid via payroll deduction thus soon after termination the loan is defaulted unless the participant has the means to pay it all off.

[Guest mjb]

Advise participant to repay the loan from another source such as an equity line of credit or a credit card (or have spouse take out plan loan to provide repayment funds) to avoid imputed income tax or allow roll over of loan balance to another plan. Why does plan have to administer loan after other assets are paid out since plan is not terminated until all assets including loan balance are distributed?

[Randy Watson]

Advise participant to repay the loan from another source such as an equity line of credit or a credit card (or have spouse take out plan loan to provide repayment funds) to avoid imputed income tax or allow roll over of loan balance to another plan. Why does plan have to administer loan after other assets are paid out since plan is not terminated until all assets including loan balance are distributed?

Good advice. I like those ideas. Thanks.

[Belgarath]

A slight twist upon this question. Plan termination date is 12/31/2013. Assets likely won't be distributed until March or April of 2014. In the meantime, the Loan Policy states, "A loan, if not otherwise due and payable, is due and payable on termination of the Plan..."

It seems to me that this is ambiguous enough to be interpreted either that loan is due and payable as of 12/31, or payments can and should be made until assets are distributed. Personally, I feel like the second interpretation is more technically correct.

Any thoughts either way?

[stephen]

I suggest you check with the attorney for the document. To me that language says the loan is due and payable as of the termination of the plan on 12/31.

[Belgarath]

Thank you for your thoughts. Since the Loan Policy specifies "termination of the Plan" rather than "termination date," what is your thought on the position that a plan isn't considered "terminated" until all assets are distributed? A plan, particularly a DB plan which files for a D-letter, might not distribute assets for a year or two. Would you still maintain that loans are due and payable on the termination date?

Thanks again.

[Bird]

I'd have no problem letting payments continue until assets are distributed.

[stephen]

I advise on the conservative side of things. Thus, I suggested you confirm with the ERISA Attorney for the plan (or in house attorney if applicable) as they would be defending the position should the plan be audited upon plan termination.

[masteff]

Even if it's due and payable on 12/31, it's not deemed or actually distributed until some later date. So I have no problem with payments continuing (it is due and payable after all, so they better pay on it!!!), unless you have either a) a provision that says a "due and payable" loan can only be paid in full or b) a provision that bars any loan payments at all during the termination.

If we look at it in terms of commercially reasonable lending standards, in my opinion, it's entirely reasonable to continue accepting payments until the event that zeros out the loan.