Using 'Hardship' criteria as Plan Loan criteria (?)

[ERISAatty]

This a new one on me. I have just discovered that client has had a long practice of requiring that an applicant for a Plan Loan demonstrate a financial hardship (and they use the safe-harbor definitions of hardship, i.e. 213(d) medical expenses costs, costs related to purchase of principle residence, costs for tuition, and expenses to prevent eviction).

Now they want to expand the list of loan application criteria and asked about the risk of doing so.

Since there are no such limitations required on plan loans, the only 'risk' I see is that they'll get more loan applications. But by making the loans more broadly available, I think they'll actually better comply with the requirement that loans be available on a 'reasonably equivalent basis.'

Any thoughts?

Has anyone else ever seen a plan limit loans using a 'hardship'-type test?

[Kevin C]

I've seen it before on takeover plans. It is also briefly mentioned in the DOL loan regs.

2550.408b-1(a)(4) Example (8): Plan P establishes a participant loan program. All loans are subject to the condition that the borrowed funds must be used to finance home purchases. Interest rates on the loans are the same as those charged by a local savings and loan association under similar circumstances. A loan by P to a participant to finance a home purchase would be subject to the relief provided by section 408(b)(1) provided that the conditions of 408(b)(1) are met. A participant loan program which is established to make loans for certain stated purposes (e.g., hardship, college tuition, home purchases, etc.) but which is not otherwise designed to benefit parties in interest (other than plan participants) would not, in itself, cause such program to be ineligible for the relief provided by section 408(b)(1). However, fiduciaries are cautioned that operation of a loan program with limitations may result in loans not being made available to all participants and beneficiaries on a reasonably equivalent basis.

[jpod]

I've seen it many times. The downside is it might dissuade the lower paid people from participating, thereby hurting ADP and ACP. The upside is it's good policy (i.e., retirement plans should be used primarily to fund for retirement, not to save for the next car).

[ERISAatty]

Thanks for your helpful responses!