Are loans subject to 401(a)(4) BRF Rules?

[LCARUSI]

Phil L posted an interesting question on another board concerning loans. There were no repsonses. Since loans are an integral part of 401(k) Plans, I am putting a copy here hoping there will be some response(s):

From Phil L -

From reading the regulations in 401(a)(4), it appears that loans are a benefit, right, or feature that must be offered on a nondiscriminatory basis. The regulations seem to say that nondiscrimination is proved only if loans are currently available and effectively available. If my understanding is correct (and it may very well not be), you could write your plan to allow loans only to active employees, but then you would have to prove nondiscrimination which amounts to a ratio percentage test in which all terminated particpants would be treated as not benefiting. Is this correct or am I misguided? Thanks in advance for your help!

[Tom Poje]

I thought the BRF test in this case(if my memory serves me correctly) worked as follows:

only consider one group of 'people'.

in this case, 'active' or 'terminees'.

the other group is treated as excludable.

now run your test. In your case, the BRF is looking to make sure you are not allowing loans to terminated HCEs in a discriminatory manner. e.g. of the terminees, only terminated HCEs are eligible for a loan.

[Dawn Hafner]

See DOL Opinion Letter 89-30A. It is the DOL's position that "to the extent that loans are made available to participants and beneficiaries who are parties in interest, (i.e. current employees)loans must be made available to all participants and beneficiaries who are parties in interst on a reasonable equivalent basis". Therefore, a loan program that exludes all former employees would not meet this requirement. Usually, most loan policies state that current participants and all parties in interest are eligible to apply for a loan. This shouldn't cause much of a problem though, as there will be very few former employees who are parties in interst.

[david shipp]

Dawn is correct that the only terminated participants that have to be offered loans under DOL requirements are those who are also "parties-in-interest."

Since those who meet both conditions are likely to be highly compensated employees, IRS grants a pass under 1.401(a)(4)-10©.