3 outstanding loans and policy permits a max. of 2

[Guest Iwonder]

A loan policy permits a max of 2 loans outstanding. Due to a pay-off with a NSF check, a third loan was permitted to a participant.

One of the loans must go. Which one?

Is this a default situation where the plan must wait for a quarter before defaulting?

Or, can this be corrected immediately and, if so, how? Could a distribution of a one of the loans be made...... and, if so, which one?

OH MY!!! (because controls have been added this will not happen again, but the situation at hand must be corrected)

How have others handled this? I've examined EPCRS and it seems silent as to this type of problem.

[mphs77]

A loan policy permits a max of 2 loans outstanding. Due to a pay-off with a NSF check, a third loan was permitted to a participant.

One of the loans must go. Which one?

Is this a default situation where the plan must wait for a quarter before defaulting?

Or, can this be corrected immediately and, if so, how? Could a distribution of a one of the loans be made...... and, if so, which one?

OH MY!!! (because controls have been added this will not happen again, but the situation at hand must be corrected)

How have others handled this? I've examined EPCRS and it seems silent as to this type of problem.

My first take wold be that the if the Trustee had waited until the payoff of a previous loan was complete (and thus not paid with an NSF), the third loan would not have been made. It looks to me as if the third loan is actually a distribution from the Plan. If the Employer does not wish to amend the loan policy to permit 3 loans per participant, we have a distribution of the amount taken as the third loan. I do hope this person qualifies for some in-service distribution procision of the Plan.

[Guest Iwonder]

You are correct that had the plan administrator (rather than the trustee) acted correctly, this would not have occurred. The plan administrator has established controls to ensure that it will not again occur.

That being said, the fact remains that a 3rd loan was erroneously approved and the situation must be corrected.

Has anyone dealt with a error of this nature and corrected and, if so, how?

Is this a default situation where the plan must wait for a quarter before defaulting?

Or, can this be corrected immediately and, if so, how? Could a distribution of a one of the loans be made...... and, if so, which one?

[JanetM]

The participant obviously knew what they were doing. Is it too late to put stop payment on the check and get funds back? That would put the participant at the mercy of the back that cashed the check, not the plan.

[Guest Iwonder]

The participant obviously knew what they were doing. Is it too late to put stop payment on the check and get funds back? That would put the participant at the mercy of the back that cashed the check, not the plan.

Unfortunately, and as is usually the case, the situation was caught too late. Your observation that the participant knew what he was doing is spot on........the participant worked with the timing of the check and the processing of the loan.

So, now there is a loan in violation of the loan policy. The plan administrator does not want to amend the plan. EPCRS does not address and the situation must be remedied.

Any suggestions?

Is a default possible, do you think? If so, which loan and on which date should the loan be defaulted?

[JanetM]

Couple suggestions - no direct advice.

First I would look to see of the 3 loans exceed the max allowed under IRC to see if you in service w/d that is taxable.

If the cure period for #2 has not passed it isn't in default. If the P make single payment on #2 (assuming they are up to date on #1) then #3 will be defaulted immediately since there can't be 3 loans and the P has acknowledge the first 2. If P does not make payment on #2 seems to me they are admitting #3 is in service w/d.

[BG5150]

Does #3 get defaulted or deemed a distribution? I would think the latter. A defaulted loan is still an asset of the plan until offset, whereas the deemed distribution wipes the loan completely off the books.

Should this participant not terminate in the near future, loan # 3 would not be offset. So if he wanted to take another loan in the future, he would still have to pay back the defaulted loan before a new one could be taken. If it is deemed as a distribution, there is no longer that problem.