loan rollover

[pmacduff]

Ok - here's my situation...we have a client where one of the partners is leaving and joining another firm. He currently has an outstanding loan balance. He has already checked with the his new Employer's plan administrator and they will accept his loan balance as a rollover (we'll be providing them with the backup loan origination forms and amortization per their request).

The plan I adminster, however, does not allow for distribution until after the val date following termination; in this case after 12/31/2006. All plan distributions are done once the safe harbor contribution has been made in the following year (could be as late as Oct if the client is on extension (self-employed partnership).

The loan provisions of this plan state that the loan becomes due and payable upon termination of employment. According to the plan loan policy, the loan will default in the quarter following the quarter in which the last payment was made if payments cease.

The client wants to work with this terminated employee to address the loan situation. They don't really want to change the plan distribution date, because then they will be doing multiple distributions whenever someone leaves. I'm not sure if they want to change the loan policy to allow for repays from terminees to keep this loan current.

Does anyone have any suggestions?

[Guest Lawrenceg]

Having been in similar situation, you have the problem of the promissory note requiring payment in full on termination and the problem of the loan defaulting as the loan procedure does not allow for repayments that are not salary deducted.

You will have to adjust both the promissory note and the loan procedure to allow for continued payments after termination that are not salary deducted. Neither action requires a plan document amendment and can be done by adjusting the procedures. If you do so, make sure that all participants know about the change.

To protect the plan from going into the collection business, you should consider having the payments made to the employer as a conduit for the loan payments to the plan.

[JanetM]

Make small adjustment to loan procedures and allow the terminated employee to continue making monthly or quarterly payments on the loan balance. That will keep the loan out of default and the funds and loan asset can be distributed at one time.

[pmacduff]

Thanks for the replys.

As mentioned in the original post, I'm not sure if the client wants to change the loan policy to allow for repays from terminees (just to keep this one loan current). They aren't the type to want to hassle with keeping track for an ex-employee (even if it WAS a former partner).

I'll be checking with the client re: amendment to the loan policy to allow terminees to make payments. They could have this guy pay quarterly to keep the loan current until transfer which wouldn't mean having to do that many repays in the interim.

Thanks again.

[Guest Pensions in Paradise]

Why not just amend the plan to allow for immediate distributions of loans upon termination of employment?

[pmacduff]

I guess I wasn't thinking that loans could be treated differently from the balance of the account with regard to distribution upon termination.

So - we can just amend the loan policy where it says that loans are "due and payable upon termination of employment" and add language to allow for rollover upon termination?

[Blinky the 3-eyed Fish]

You need to amend the document to allow for the distribution of the loan balance immediately, not the loan policy.

[namealreadyinuse]

The loan note is just antoher asset, so you would have to amend the plan to allow partial distributions. You might not be able to limit it to loans, though (especially for a HCE) and then you are in a spot where you are making distributions before your valuation date.

You have said they don't want to change distribution procedures and they don't want to change loan procedures, so he is out of luck. That is ok.

[pmacduff]

so Blinky - can we amend the distribution provisions to allow only for loan distribution at the time of termination and the balance of the account following the val date following termination? As NAIU mentioned, this is an HCE.

It isn't that the client won't amend the distribution provisions with regard to loans, but they want to have terminees wait for the "cash" balance of their account so that they aren't having to process multiple distributions. We don't see that many loans being rolled, in general, and this was the first and only loan in this plan.

The loan policy states that the loan becomes due and payable upon termination, so we would have to amend that as well to address the rollover.