late loan repayments en masse

[Santo Gold]

This is bad: For the past several years, participants who took loans from the company 401(k) Plan never had any loan repayments made. Not their fault, for some reason the person in charge of having these withheld from their pay and deposited back into the plan, just dropped the ball badly and never triggered these repayments. The participants, out of either ignorance or perhaps sensing an error in their favor, never noticed or said anything about it.

Looking for possible consequences:

(i) For the more recent loans which still have a few years left on their repayment terms, can we go back and re-amortize the outstanding balance, coming up with a new (higher) repayment schedule for the rest of the remaining terms of the loan?

(ii) For the others whose loans are either close to the end of their repayment schedule (or in some cases, that date has already passed), are they stuck with having this a deemed distribution and being taxed on this this year? Am I correct that they still have to pay the loan back, but still get taxed on it this year as well? Does it matter that this is not their fault since it was the employer who did not make the deposits?

I know there is a lot wrong here and I am checking into all of the consequences, but if anyone can point out a few of the major problems, that would be a great help.

Thanks

[Leopurrd]

You have late contributions to the plan - so you need to file a 5330. The late interest needs to be allocated to affected participants. That's the good news.

The bad news is, I don't think you can save the deemed loans. It really is the participant's responsibility (and the employer's!) to make sure everything is going where it should be.

If I were you, I'd deem loans pursuant to current regs and then use the loan repayments towards the deemed loans and start an after tax basis in the plan. This way, the plan is in compliance by issuing 1099-R's, and the taxes are made up when the participant takes a distribution via their after tax basis.

Good luck in making these corrections! Hopefully the interest payment and excise tax is high enough to teach them a lesson

[GBurns]

Teach "them" who, a lesson ?

Isn't failure to collect loan repayments as per plan loan terms a failure to operate according to the plan ?

Isn't failure to enable or enforce loan repayment a breach of fiduciary duty ?

If any of these are correct, then What is the employer/Plan Sponsor's liability for contributory negligence ?

I suggest that you tread lightly and carefully, if you take a position, like Leopurrd seems to be doing, that this is entirely the employee's fault. All you need is 1 employee to complain to open what could be a can of worms and who knows what else exists.

[Guest Sieve]

You absolutely can save some of these loans.

EPCRS has a correction procedure for precisely this situation, where non-repayment was not the fault of the employees. You can re-amortize the loans over the remainder of the possible 5-year period (if any of that period remains), and, for those that cannot reamortize (because they're beyond the 5-year period), you can request that the 1099-Rs be issued for the current year rather than the year the loans should have been deemed distributed. Note, too, that a participant is never required to pay back deemed distributed loans--it's just that future deemed accrued interest comes into play with regard to the maximum amount of any subsequent loan if a deemed loan remains outstanding.

Contributory negligence my goalie mask (I wore one when I got older)!! The employees who must make higher payments or have deemed distributions certainly have themselves to blame, also, and were taking advantage of a glitch in the system. The loan repayments weren't showing up as deductions from their pay, and not showing up as contributions to reduce the amount of the loan on their statements--they have some obligation to point out an error, even if it's one made in their favor. Someone who receives 4 $100 bills as change for a purchase with a $5 bill isn't blameless when confronted by a cop down the road . . .

But, that diatribe aside, this is fixable. In some instances, the employer also may want to gross up the employee in order to pay necessary taxes.

[Guest mjb]

You absolutely can save some of these loans.

EPCRS has a correction procedure for precisely this situation, where non-repayment was not the fault of the employees. You can re-amortize the loans over the remainder of the possible 5-year period (if any of that period remains), and, for those that cannot reamortize (because they're beyond the 5-year period), you can request that the 1099-Rs be issued for the current year rather than the year the loans should have been deemed distributed. Note, too, that a participant is never required to pay back deemed distributed loans--it's just that future deemed accrued interest comes into play with regard to the maximum amount of any subsequent loan if a deemed loan remains outstanding.

Contributory negligence my goalie mask (I wore one when I got older)!! The employees who must make higher payments or have deemed distributions certainly have themselves to blame, also, and were taking advantage of a glitch in the system. The loan repayments weren't showing up as deductions from their pay, and not showing up as contributions to reduce the amount of the loan on their statements--they have some obligation to point out an error, even if it's one made in their favor. Someone who receives 4 $100 bills as change for a purchase with a $5 bill isn't blameless when confronted by a cop down the road . . .

But, that diatribe aside, this is fixable. In some instances, the employer also may want to gross up the employee in order to pay necessary taxes.

S:

Contributory negligence is a defense in an action at law for money damages. However under ERISA suits are brought as an action in equity where the determining question is whether there has been a breach of fiduciary duty.

[Guest Sieve]

mjb --

Understood--although, since I'm not a litigator I don't know all the ERISA litigation equity ins-&-outs (well, I know about them, but I almost never have to deal with them). I really was responding to an earlier post suggesting that the employer is the one causing all this terrible hardship on the innocent employees (who, by the way, remained understandably silent during the process--but who would certainly have spoken up if their pay was reduced but was not credited to the loan balance).

And, for what it's worth--since you asked --if the individual has includible income as a result of all this, c'est la vie (another ERISA term--citation provided upon request). I know the employer messed up, but the employee put money into the plan without income taxes, took it out without paying income taxes, and then didn't question why the loan no longer was being payroll deducted). Last time I looked, paying taxes, however distateful it might be at times, was sort of an obligation of most everyone with a job.

Nevertheless, the IRS will overlook this issue under EPCRS if it can be demonstrated that the error in failing to withhold was not the participant's.

[Guest mjb]

mjb --

Understood--although, since I'm not a litigator I don't know all the ERISA litigation equity ins-&-outs (well, I know about them, but I almost never have to deal with them). I really was responding to an earlier post suggesting that the employer is the one causing all this terrible hardship on the innocent employees (who, by the way, remained understandably silent during the process--but who would certainly have spoken up if their pay was reduced but was not credited to the loan balance).

And, for what it's worth--since you asked --if the individual has includible income as a result of all this, c'est la vie (another ERISA term--citation provided upon request). I know the employer messed up, but the employee put money into the plan without income taxes, took it out without paying income taxes, and then didn't question why the loan no longer was being payroll deducted). Last time I looked, paying taxes, however distateful it might be at times, was sort of an obligation of most everyone with a job.

Nevertheless, the IRS will overlook this issue under EPCRS if it can be demonstrated that the error in failing to withhold was not the participant's.

Last I looked the plan adminstrator is solely reponsible for adminstering the plan, not the employees and the PA cannot pass the buck to them if he screws up. Its called the rule of too bad, tooo sad.

[Guest Sieve]

PA didn't screw up. It was the employer as employer (not as PA) who failed to withhold loan repayments from paychecks, so if there is any remedy it would be against the employer but not under ERISA--unless you somehow put onto the PA the oversight of payroll practices or unless you suggest that the PA is responsible for verifying that each loan is repaid, on a payroll basis, exactly as required, and must alert the employer to any discrepancies in its payroll system (or unless, under some other legal theory, there is a merger of the employer as employer and the employer as PA into one entity). It is my understadning that most TPAs don't verify loan repayments against the amortization schedule but leave that up to the empoyer, so the TPA generally has no way of realizing that loan repayments are not being made.

[GBurns]

Isn't it the TPA who keeps the records and therefore the loan account details, not the employer ? If so, then it is the TPA who would see that loans were not being reduced. Come to think of it, I do not see how an employer would or should be reconciling loan accounts or monitoring loan amortization schedules.

The employer screwed up and the TPA failed to monitor.

As for the bank analogy, What could the cop the cop possibly bring as a criminal charge ?

[Guest Sieve]

A. I agree that employer (as employer) messed up by not withholding properly. TPA should have monitored, but TPAs generally don't--thus, the problem continued. Under EPCRS, is is not the employee/participant's fault, so it would be correctable (but the employee may have a deemed distribution).

B. I wasn't using the analogy to demonstrate criminal culpability (although I would assume there would be some criminal activity when you walk away with $400.25 as change after purchasing a $0.75 item with a $5 bill, even if the extra $400 is given to you voluntarily but in error.) I was simply pointing to the fact that you can't play dumb and blame the employer for not withholding from payroll in order to repay a loan if it should have been obvious to you, with any kind of due diligence, that an error (which turned out to be inadvertent) had been made in your favor.

[Guest mjb]

PA didn't screw up. It was the employer as employer (not as PA) who failed to withhold loan repayments from paychecks, so if there is any remedy it would be against the employer but not under ERISA--unless you somehow put onto the PA the oversight of payroll practices or unless you suggest that the PA is responsible for verifying that each loan is repaid, on a payroll basis, exactly as required, and must alert the employer to any discrepancies in its payroll system (or unless, under some other legal theory, there is a merger of the employer as employer and the employer as PA into one entity). It is my understadning that most TPAs don't verify loan repayments against the amortization schedule but leave that up to the empoyer, so the TPA generally has no way of realizing that loan repayments are not being made.

S:

Since the loan is between the employee and the plan (not the employer), the Plan Administrator is responsible for making sure that the terms of the loan are complied with including repayment. Plan admininstrator can delegate loan administration to TPA but loan adminsitration is a plan, not employer reponsibility since employer is merely a conduit for remitting the loan payments.

Also I dont know where you learned criminal law, but I thought that in order charge someone with a committing a crime it is necessary to show criminal intent. Merely accepting an overpayment does not demonstrate criminal intent. For example, there many taxpayers have received overpayments of the federal rebate tax program but are waiting for the IRS to contact them because there is no procedure to return the payments to the IRS.

[Guest Sieve]

Obviously, my need to know criminal law is limited in the ERISA arena, so I do not apologize for my ignornace--I knew enough, once (long ago), to pass bar exams, and that's the extent of my knowledge (although I clearly know less, now, than then). I would venture to say, however, that leaving a store with $400 in your pocket representing change for a $5 bill is intent to commit some kind of crime (coversion, theft, who knows), just like leaving a store without paying for clothes is intent to commit a crime (while taking them into a changing room is not). But, you know, I really don't care a whole lot--it was an example of lack of clean hands, for heaven's sake, not a discussion of substance.

On the other hand, what I was saying about the loan was that on a practical level, even though the TPA may be heavily involved (making the loan, obtaining a signed promsisory note, generating an amortization schedule and sending it to the employer, etc.), it is the employer who actually puts the payroll withholding in place, and makes arrangements for the withholding to commence, and makes sure that withholding continues when there is a change of payroll provider or a change of payroll-provider software, etc. Nothing the TPA can do about that.

So, I would say that the employer is the one who screws up when payroll withholding does not occur, just like it is the employer who is at fault if withholding does not occur for a salary deferral--although, for a loan, the TPA also has the appropriate info and may not have checked up that employer was doing what was necessary. As I said, most indpendent TPAs that I know do not check on a payroll basis to see that all loans are properly being paid off according to their terms--if that had happened here, the problem would not have been discovered so late.

My bottom line: correct under EPCRS (VCP).

[GBurns]

S.

The TPAs that you seem to be seeing are, IMHO, shortchanging the PS. The employer has no way to generate the loan amortization schedule, no way to monitor it and no way to reconcile it. Such duties fall on whomever does the administrative functions, namely, the TPA.

If I were this employer, my first stop would be to check the contract to see what this TPA should have been doing.

Yes, there is some employee blame, but employees are simple people who are given limited, information and limited knowledge about the operation of the Plan.

It is the TPA etc who hold themselves out as experts and the solution to the problems of plan sponsorship, and who, for a good fee, agree to provide professional services, par excellence. Let them live up to the hype.

[Guest mjb]

Obviously, my need to know criminal law is limited in the ERISA arena, so I do not apologize for my ignornace--I knew enough, once (long ago), to pass bar exams, and that's the extent of my knowledge (although I clearly know less, now, than then). I would venture to say, however, that leaving a store with $400 in your pocket representing change for a $5 bill is intent to commit some kind of crime (coversion, theft, who knows), just like leaving a store without paying for clothes is intent to commit a crime (while taking them into a changing room is not). But, you know, I really don't care a whole lot--it was an example of lack of clean hands, for heaven's sake, not a discussion of substance.

On the other hand, what I was saying about the loan was that on a practical level, even though the TPA may be heavily involved (making the loan, obtaining a signed promsisory note, generating an amortization schedule and sending it to the employer, etc.), it is the employer who actually puts the payroll withholding in place, and makes arrangements for the withholding to commence, and makes sure that withholding continues when there is a change of payroll provider or a change of payroll-provider software, etc. Nothing the TPA can do about that.

So, I would say that the employer is the one who screws up when payroll withholding does not occur, just like it is the employer who is at fault if withholding does not occur for a salary deferral--although, for a loan, the TPA also has the appropriate info and may not have checked up that employer was doing what was necessary. As I said, most indpendent TPAs that I know do not check on a payroll basis to see that all loans are properly being paid off according to their terms--if that had happened here, the problem would not have been discovered so late.

My bottom line: correct under EPCRS (VCP).

S:

If you are going to represent yourself as an attorney then you need to make sure that you statements about the law are accurate and not exaggerated. If you dont know the elements of criminal law then do not give a faulty example that can be picked apart by a first year law student. Leaving a store without paying for an item is not evidence of any crime because the clerk may have failed to scan the item or the item may have failed to scan before it was bagged. Your lack of interest is extremely evident. Clean hands is a doctrine in equity, not criminal law.

As for liability if the loan is not withheld from the employees's paycheck, if the employer never withheld any amonts would the plan deem the loan paid up after 5 years and discharge the debt because no one ever noticed that payments were not withheld?

[Kimberly S]

As TPA, we provide the amortization schedule and other paperwork, but it is clearly the employer who must make arrangements for payroll deduction of the loan payments. If sufficient loan payments are missed to cause the loan to go into default, as a bundled service provider, we are able to notify the trustee of this problem and what steps they need to take to correct it.

When I worked for an unbundled service provider, we rarely knew if a loan had been taken until months after the fact. There is no way we could have provided the level of oversight that George is suggesting.

[GBurns]

Kimberly S

You admit that a bundled service provider would have noticed and informed the employer.

You also stated that an unbundled service provider would not even know that a loan was taken out. This puzzles me. The nature of double entry bookkeeping dictates that you must know the source and purpose of entries. How else would the system know to differentiate between a loan repayment, an elected contributon, a QNEC etc.. The oversight required is mainly to look at the totals of the columns which must be done anyhow when crossfooting to balance a report.

I bet that the services contract states that such oversight was supposed to be done. I do not have a contract available and hope that someone will actually look at a contract a let us know what is said.

[Guest Sieve]

mjb --

The facts in my example of leaving the store without paying for clothes were that there was an intent to leave without paying for the items. I just forgot to say so. Leaving a store without paying for items may be evidence of a crime. The devil's in the details.

Besides, the criminal law stuff in my posts is dicta, my dear mjb, dicta--not a holding. That's first year law school stuff, too--correction: first week.

I do not understand why you find my absolute lack of first-year law student knowledge of criminal law (&, by the way, at my apparently inferior law school we did not take criminal law until 2nd year) to be of any signficance in this analysis whatsoever.

I'm sorry if I've besmirched the name of all attorneys everywhere--and the stellar reputation of lawyers generally--by suggesting that walking out of a store without paying for the clothes you are taking with you is always a crime. If any of you, due to my blatant misrepresentation, is somehow disappointed that you are not arrested for such an activity in the future, please blame me. Just submit the time and date of the activity to me offline by PM, and I will personally apologize.

But, please be aware that I may not respond to your PM, because, after all, my "lack of interest is extremely evident".

[Kimberly S]

Kimberly S

You admit that a bundled service provider would have noticed and informed the employer.

You also stated that an unbundled service provider would not even know that a loan was taken out. This puzzles me. The nature of double entry bookkeeping dictates that you must know the source and purpose of entries. How else would the system know to differentiate between a loan repayment, an elected contributon, a QNEC etc.. The oversight required is mainly to look at the totals of the columns which must be done anyhow when crossfooting to balance a report.

I bet that the services contract states that such oversight was supposed to be done. I do not have a contract available and hope that someone will actually look at a contract a let us know what is said.

George,

It's not a matter of not knowing how to do accounting. When the TPA does not have direct access to the aseets and only sees statements once a year, often several months after the end of the year, it is easy for a loan to have been taken or a payment missed more than a year before the TPA learns about it.

In a perfect world, the client would be in regular contact with the TPA before and during the process, but the reality is that they aren't always. I've spoken to clients about loans who said they wondered when we were going to send them the payment information -- even though they never told us about the loan.

[GBurns]

Having access to assets and I assume you mean investment account statements have nothing to do with accounting for and reconciling employee contribution accounts.

I wonder why a client would have been expecting to get such information. Could it be that those were among the items that they thought they were paying for or were told would be provided ? The answer probably lies in the contract. Which is why I hope someone looks at an actual services contract and lets us know what is there.

[GBurns]

S.

Is that a flip-flop or just a change in posture ?

[Guest Sieve]

Geroge -- At this point, I think it best to move this unrelated conversation to PM so we can focus here on TPA-employer relationships & loan processing/recordkeeping.

[Kimberly S]

Having access to assets and I assume you mean investment account statements have nothing to do with accounting for and reconciling employee contribution accounts.

I wonder why a client would have been expecting to get such information. Could it be that those were among the items that they thought they were paying for or were told would be provided ? The answer probably lies in the contract. Which is why I hope someone looks at an actual services contract and lets us know what is there.

Employee contribution accounts are reconciled on an annual basis when the investment statements for the pooled funds to which they are deposited are received.

Yes, those are documents that they should reasonably expect us to provide, but we cannot provide them before someone tells us that they are needed and such details as the loan amount, repayment terms and interest rate. That the trustee or employer has chosen to distribute the funds before handling the necessary paperwork may be a breach of fiduciary duty, but it is relatively common with small plans and not within the control of the TPA.