Is this really a participant loan?

[K2retire]

We are in the process of converting a plan that used to be with a large insurance company, invested exclusively in annuities. I've never encountered anything like this, and I'm wondering if anyone can fill me in on what I'm missing.

According to the insurance company, participant loans cannot be transferred to another provider, and they intend to retain sufficient plan assets to collateralize the outstanding loan balances. They say this is because the plan was previously invested in fixed annuity products that could not be liquidated. Therefore the participant loans were made not from plan assets, but from insurance company assets, and must be repaid to the insurance company.

That sounds to me like a third party loan for which the participant has pledged his or her account balance as collateral, not a true participant loan from the plan. Is this really standard practice for plans with annuities?

[J Simmons]

We are in the process of converting a plan that used to be with a large insurance company, invested exclusively in annuities. I've never encountered anything like this, and I'm wondering if anyone can fill me in on what I'm missing.

According to the insurance company, participant loans cannot be transferred to another provider, and they intend to retain sufficient plan assets to collateralize the outstanding loan balances. They say this is because the plan was previously invested in fixed annuity products that could not be liquidated. Therefore the participant loans were made not from plan assets, but from insurance company assets, and must be repaid to the insurance company.

That sounds to me like a third party loan for which the participant has pledged his or her account balance as collateral, not a true participant loan from the plan. Is this really standard practice for plans with annuities?

Sounds screwy to me too, k2retire. I.e., like a third party loan. I have not run across this, but I could possibly see how the DoL might have granted an exemption for this type of thing.

[Jim Chad]

I would not accept that for an answer. When the loan was done is was not the insurance companies option whether or not they wanted to liquidate part of the annuity. That is what they were required to do.

I don't mean this in any mean way. no one knows everything. ( And some of us know a lot less than others LOL) But I really think that answer came from someone who is confusing the way life insurance policy loans work with the way qualified plan loans work. I would want to talk to someone higher up.

[david rigby]

What does the plan say?

What does the plan's loan policy say?

[Bird]

Yes, that is interesting; I've never seen it. Is the insurance company going to surrender the contracts and just keep the amount remaining on the loans as collateral? If so, then I don't think it's a problem - e.g. if someone had a $10,000 cash value in an annuity, and a $2,000 loan, and the insurance company surrenders the policy, keeps $2,000, and sends $8,000 to the successor custodian, then you can treat the other $2,000 as if it had been transferred as a loan. Effectively, it's no different than if a $2,000 loan had been processed immediately before the transfer in a manner that we would all be more familiar with, as a direct reduction in the CSV, and $8,000 was left to transfer.

I've also learned that big insurance companies hand out wrong information like candy, so you might want to review the annuity statements to see if what they've described is accurate, and/or call again to see if you get a different answer.

[K2retire]

What does the plan say?

What does the plan's loan policy say?

The plan refers to the loan policy, which the client can't seem to locate. According to the insurance company, each loan application also includes the information that the loans are not transferrable.

At this point I'm told the contracts have been surrendered, except for the part they've retained as collateral. And they are declining to provide us, as the new TPA, with any further details other than a promise to transfer loan payments received at the end of each year.

The thing that totally mystifies me is why they would want to keep the loans after the balance of the plan had been liquidated and transferred. For most of us loans are the thing we want to get rid of!