Limiting Loans to Contracts with Approved Vendors

[Guest ebailey]

Does anyone see a non-discrimination issue or any other issue with a governmental plan (for a state university) limiting loan and hardship withdrawals to only participants who have accounts with the 2 approved vendors (so as to limit the need for Info Sharing Agreements- with vendors of those participants who haven't moved to the approved vendors and other compliance issues). If other particpants want loans they can exchange contracts for a contract with an approved vendor. Any thoughts?

[QDROphile]

I am missing provisions in the regulations that cover an independent exchange from a cowboy contract to a contract with an approved vendor.

[Guest ebailey]

Not exactly helpful...

Maybe some additional information would be productive ... We have two approved vendors (now); however we have many accounts out there with other vendors that we did not require to transfer to the approved vendors (very political). We can find some of these "cowboy" accounts through payroll records however for accounts to which no current contributions are made we are having difficultly being sure we have found everyone that should be included in the plan document. We would like to simplify things and limit loans/hardship withdrawals to only participants who have contracts with one of the approved vendors (we would like to ensure any relief offered by 2007-71 is granted for those accounts we cant find, for former employees etc). The regs do speak to loans and hardship rules but don't touch on non-discrimination when it comes to government plans (only the prohibited transaction rules seem to touch on those - and they also don't apply to govt plans). Any other thoughts?

[Peter Gulia]

Before considering nondiscrimination under IRC 403(b), a governmental employer should consider what restraints apply under State laws. Some States' laws could be interpreted to preclude plan provisions of the kind described.

Also, if an insurer's or custodian's annuity contract or custodial-account agreement is not among a plan's recognized investment alternatives, what agreement or document would impose the plan provisions on the insurer or custodian, and how confident are you that it would be legally enforceable against the insurer or custodian?

[rcline46]

How would you know if the participant went directly to the contract issuer, especially a terminated employee?

[Guest ebailey]

We wouldn't - which is a concern. We thought of writing to all known vendors giving them the contact for our administrator etc and imploring them to follow the 72(p) rules so that we could rely on the relief in 2007-71 8.02 which gives relief from plan doc failures if the issuer made a good faith effort when giving loans to former employees- but we didn't think we could rely on them following the aggregation rules etc. Therefore, we thought telling all known vendors that they can't give loans/hardship withdrawals - seemed safer and easier. Doesn't mean the vendors would follow the prohibition on loans/hardship either but seems like a better "good faith effort" on our part.

[J Simmons]

The cowboy contracts that have received contributions since 1/1/2005 have problems if you offered the vendor (who refused) to subjugate its contracts to your new 403b plan if that vendor makes a loan without obtaining verifying certain information from you. The problem for such a cowboy contract would be the plan document requirement.

If you are contacted by the cowboy contract vendor and asked for information or verification of information that is relevant to the vendor possibly making the loan (or not), then provide that requested information and give a caveat that the employer is unaware of what other loans (and balances) the employee may have from any other cowboy contract, and therefore the employer cannot give any type of approval, explicit or implicit, about the propriety of the inquiring vendor making the loan or what impact it might have on the cowboy contract or the employee's other cowboy contracts.

Note, allowing loans/hardships from the 2 approved vendors involves hazards for the employer. That is because the eligibility might be based on information that does not take into account what has happened with a cowboy contract that same employee has.

[QDROphile]

Let me try to be a little more helpful. What is your basis for the statement that, without more, "if other participants want loans they can exchange contracts for a contract with an approved vendor"?

[Guest ebailey]

The thought was that to ensure that everyone had access to loans if they wanted them, if a participant had an account with a vendor other than an approved vendor, that such a participant could exchange his/her contract to a contract with an approved vendor and then from the approved vendor he/she could get a loan. We can't see where there are any preclusions from limiting the loans/hardship withdrawals in this way - but that doens't mean they aren't out there and we haven't thought of them. Thanks for any insight.

[QDROphile]

I don't see how someone could exchange a cowboy contract for a contract with an approved vendor.

[J Simmons]

Section 8.03 of Rev Proc 2007-71 specifically explains a re-exchange back into the 403b plan where the employee attempted a Rev Rul 90-24 exchange after such was forbidden as of 9/25/2007 cures the fact that the 'intermediary contract' vendor does not have an info sharing agreement with the ER. That would be one subset of what I have understood ebailey meant by 'cowboy contract'.