Rollover of Loans to another qualified plan

[Guest Interested Party]

I work in client services for a retirement program sponsored by a prototype plan. There are approximately 4,000 small employers nationwide that use this prototype and retirement program. Several of these plans allow for loans. One of our clients has dissolved its business and is terminating the plan. One of the participants has an outstanding loan in the amount of $20,000 (her overall balance is about $200K). The loan was taken out several years ago for purchase of a primary residence so it amortized over a 20-year period. Since the plan is terminated, she will have to roll over her balance to her new employer's plan and, in doing so, the outstanding balance of the loan will be deemed distributed. Even if she were to do a partial rollover and take out a new loan from her new employer's plan, she would not be able to amortize it over a period longer than 5 years since she is not using it to purchase a principal residence at this time.

The client is insisting that we should be able to roll over the promissory note of the loan "in-kind" so that she does not incur a deemed distribution of the loan balance. We have pointed him to the Special Tax Notice regarding treatment of plan loans but he thinks we are being uncooperative. No one here including our legal dept. has ever heard of rolling over the prom note in kind. He states that he has outside ERISA counsel telling him he can do this.

Has anyone ever heard of this? If so, what is the procedure for doing this? Thank you for your help.

[Guest BXO]

It's possible. Call up and ask the new employer if it is allowed. If they say "No," you are out of luck.

[Mike Preston]

There was a PLR a few years ago that said you not only could roll it over, but that minor differences in payroll processing dates (such as you would see if the prior employer paid its employees weekly, while the new employer pays twice a month) wouldn't cause the loan to fail 72(p). Good news all around, as long as the loan isn't extended. Just calculate a new payment amount based on it being paid off on the prior payoff date or before - not based on it being paid off on any date (even one day) beyond when it was previously scheduled to be paid off.

Much more critical with respect to loans that are adhering to the 5 year rule, I would imagine, but then again, maybe just as critical in this case.

The PLR was talking about, I think, 5 year loans, and while I suppose it is possible that a 20-year loan would be subject to less flexibility, I doubt it.

But as already mentioned, if the new plan won't take it (and administer it), all of this is moot.

[RCK]

Both the sending plan and the receiving plan have to allow the rollover of loans, or be amended to allow that. And in your case the accepting plan has to not only allow inbound rollovers, but it has to allow for longer loans for the purchase of a primary residence.

And there is the whole issue of the promissory note. Does the new employer have any grounds for taking payroll deductions when they are not a party to the promissory note? Well, maybe if you have the participant sign something saying that they want the pomissory note transferred to the new employer.

The Special Tax Notice did warn the participant what was going to happen. Of course that assumes that they read the Special Tax Notice.

Bottom line: it is doable, but I've only seen it done where both parties had an interest in making it work.

[Guest mjb]

If the employee's new plan is willing to accept the loan and allow payroll deduction it can be rolled over. See Reg. 1-401(a)(31)-1 Q/A 16 "A plan administrator is permitted to allow a direct rollover of a participant note for a plan loan to a qualied trust described in IRC 401(a)". The Plan administrator of the transfering plan assigns the note to the Plan admin of the new plan by a cover letter or endorsement. Just make sure the note is paid off no later than the date for the original loan.

[SteveH]

If the new employer won't accept the loan, I would suggest that the employee starts up a business venture real soon, and set up a plan. Then accept her own rollover with the loan in kind.

[RCK]

Back to my original comments: Does your prototype allow the outbound rollovers of loans?

[Guest Pensions in Paradise]

Assuming the participant isn't allowed to rollover the loan, it might be worthwhile for the participant to take out a home equity loan to repay the plan loan. Rather than having the plan loan default.

[QDROphile]

Is someone in the "legal department" going to be taken to task for incompetence? If the legal department missed this one so completely, it has no credibility. The answer is in the book, where one would expect to find it, even if the matter has not come up as a matter of experience. Also, your client gave you the answer and you couldn't work your way to it. This is pretty basic 401(k) stuff at the provider and administrator level. At a minimum, someone should have looked into the plan terms in detail to determine the plan limits. Shame on your organization. Also, shame on your client for letting you get in the way. The client should have simply told you what to do when it became apparent that you were not up to the task of helping your client achieve a reasonalbe and legal goal.

Hooray for this forum to help people with questions. There is nothing wrong with innocent ignorance. Next time, just ask the question rather than make such a blatant display of incompentence or even arrogance. I am disgusted with organizations that allow their clients to think that they are being served competently or are adamamant about the "Rules" when the organization are confined by the very small universe of the prototype that they happen to sell.

[Mike Preston]

Hmmmmm. Are we having a bad day?

The way of the world, I'm afraid.

Have you ever dealt with any of the larger organizations on this planet (I'm not talking about pension organizations, I'm talking about any organization: United Airlines comes to mind as one of the worst)? The lower level, first line individuals that one has to deal with are so focused on what they can and can not do that no amount of thinking is allowed.

I'm not saying that this is the case with the OP, but I am saying that many larger organizations suffer from the same kind of "efficiency". If one presses hard enough, though, at least in the pension world, there is usually somebody not too far up the food chain that can deal with things as they are, not as the corporate protocols would like them to be.

In this case, I agree that the legal beagles failed the OP. The OP, on the other hand, is to be congratulated for coming here and asking the question. I didn't see any arrogance in the original post, just in the legal department's guidance (such that it was).

[four01kman]

Hmmmmm. Are we having a bad day?

The way of the world, I'm afraid.

Have you ever dealt with any of the larger organizations on this planet (I'm not talking about pension organizations, I'm talking about any organization: United Airlines comes to mind as one of the worst)? The lower level, first line individuals that one has to deal with are so focused on what they can and can not do that no amount of thinking is allowed.

I'm not saying that this is the case with the OP, but I am saying that many larger organizations suffer from the same kind of "efficiency". If one presses hard enough, though, at least in the pension world, there is usually somebody not too far up the food chain that can deal with things as they are, not as the corporate protocols would like them to be.

In this case, I agree that the legal beagles failed the OP. The OP, on the other hand, is to be congratulated for coming here and asking the question. I didn't see any arrogance in the original post, just in the legal department's guidance (such that it was).

[four01kman]

Sorry for the previous post, hit the reply key instead of the add reply key. Just shows how mistakes can happen under the best of circumstances.

Qfile, one of the issues of large company legal departments is the ability to "finger read" the law and/or regulations. If it is not specifically allowed, it is not allowed is their mantra. They don't look for exceptions or work arounds. The original post posited the organization was large and dealing with a prototype plan that covered many small employers. A not unusual situation and certainly not one where sophisticated planning and document drafting would be used.

As previously posted, the rollover of a loan specifically is allowed. But ... the sponsoring organization still must allow the distribution of the loan, and the new organization must allow the receipt of the loan.

Small employers aren't always able to get the quality of providers that can best serve them for a whole variety of reasons. An indictment of an organization simply for providing the services contracted for and not the services required is not reasonable.

[QDROphile]

Sorry, I stand my ground.

I am very sympathetic to a person who has a question and posts it. I also support recognizing possible ignorance and trying to to get a correct answer. But I won't condone an organization that is not compentent to handle a matter but acts on it anyway or gives the appearance that it is providing an answer. If the organization is only providing limited services, it should have the integrity to recognize stay within in its limited scope and limited knowledge and abilities. In other words, they need to say that they cannot handle what they cannot or should not handle rather than create an impression that they are acting on authority. If employers can only afford limited scope services, that is the way of the world, but they should not be snowed into believing that they are getting greater service or expertise than they in fact hired.

I was mostly set off by reference to the "legal department, " like that was supposed to mean something. It is arrogance to create an impression of greater knowledge or authority than is really the case. The response to the client and the presentation of the question should have had a very different tone. "We are record keepers who make available a prototype document and we are not engaged or equipped to advise about such matters. We are good at what we do, but his is beyond what we do. We try to help our clients, but they have to keep in mind the limitations on what we provide to them." That was not the presentation. And the legal department should have had the same self awareness and honesty if in fact it is not prepared to do competent work. If the organization is a one-trick pony, it should not act like it is a circus and take advantage of P.T. Barnum's observation about suckers being born every minute. If the organization is not able to help properly, it should at least no do harm by distracting the client with bad information.

[Guest Pensions in Paradise]

I agree with QDROphile.

I am a TPA with no formal legal education whatsoever. On several occasions I've had to prove to legal departments of large billion dollar companies that the ERISA advice they gave was incorrect.

What's really funny, or depressing considering how you look at it, is that some of the administrators in my office with basic ASPPA training know more about ERISA than some of the "legal departments" I've spoken with.

[Mike Preston]

Actions speak louder than words. Normally, I agree with QDROphile. I can't in this case. The OP is doing the best that can be done in circumstances not fully within the control of the OP. The mere fact that the legal beagles' judgment was questioned is grounds for kudos, not flaggelation.

The OP certainly doesn't make policy for the organization and to claim that the inability to make policy renders the tone arrogant is not real world.

You would have 90% of the customer service representatives in this country quit. They won't. Not on your word, anyway.

They follow company protocol or else.

In this case, perhaps the mere fact that the OP posted the question here could be a risk for the OP.

To saddle that person with public denouncements of arrogance is, well, a bit on the arrogant side if you ask me.

Which you didn't.

But that is ok.

With me, anyway.

[Guest Robin.Wolf]

Bravo to Interested Party for knowing enough, and caring enough, to ask the question.