Loan Repayments

[Guest SRH]

Can a Loan Policy Document specify a minimum loan repayment amount? For example, a minimum loan amount of $1,000 and a minimum payment amount of $50 per pay period.

[Guest Sieve]

Nothing that I know of specifically prohibits it, but any such limitations (including, e.g., a limitation on the length of the loan) must not run afoul of the requirements of ERISA Section 408(b)(1)--and the comparable provisions of IRC Section 4975--and the ERISA Section 2550.408b-1 regs. (in particular, the requirement that loans be made available "on a reaonably equivalent basis" as described in reg -1(b)).

[BG5150]

Using that example: a loan of $1,000 and a $50 payment. Using 5% interest and a bi-weekly pay schedule, the loan would be paid off in 20 payments, which is less than a year.

Could you write something like this into the loan program:

You can take a loan out for up to 5 years, but it may be forced to be less because the minimum payment of $50 may pay the loan off sooner.

[Belgarath]

I'd be very concerned that a $50.00 bi-weekly repayment requirement would be in violation of the "reasonably equivalent" requirement, as Sieve mentions. "Reasonable" is in the eyes of the auditor, but the DOL is not notable for their concern with employer/plan administrative ease. I do believe a minimum amount this high could be a hardship for some NHC, and prevent them from being able to take such a loan.

In these days of electronic withholding/processing, where a minimum wage employee can and does sometimes have 4 or 5 dollars a week withheld for a 401(k) deferral, for example, I'd be extremely cautious about minimum repayment amount requirement. I wouldn't recommend any requirement at all, but if you do it, I'd use a very light touch!