Participant Loans on Plan Merger

[MoShawn]

Client had both a PS plan and a separate 401(k) plan, and merged the 2 effective 1/1/10. Unfortunately, we now discover that the owner had a loan outstanding from the PS Plan at the time of the merger. The 401(k) Plan has not, does not, and has no desire to permit participant loans. Do we:

a) need to amend the 401(k) to permit participant loans,

b) need to default the loan since it is not permitted in the 401(k),

c) not have a problem since the loan is from a prior plan arrangement.

I'm hoping for c), but would be ok with a). Opinions?

[Guest Sieve]

If you want (a), then, by all means, amend (although that means that all particpants will be able to take a loan--but you could limit loans, in theory, to only PS sources--i.,e., not deferrals or match).

If you do not amend, then (b) is the right answer. An alternative would be to transfer everything to the 401(k) except the loan, and keep the PSP open until the loan is repaid.

[david rigby]

1. Sieve, doesn't the answer depend on whether A was merged into B, or B merged into A?

2. If the surviving plan does not have a loan provision, could it be amended to "retain" only those loans existing at the date of merger, thus avoiding the future loan problem?

[MoShawn]

1. Sieve, doesn't the answer depend on whether A was merged into B, or B merged into A?

2. If the surviving plan does not have a loan provision, could it be amended to "retain" only those loans existing at the date of merger, thus avoiding the future loan problem?

1. Well, PS (with loans) was merged into 401(k) (without loans).

2. I like this. Essentially grandfathering in existing loans, but providing for nothing further.

[Dougsbpc]

Or amend the 401(k) plan to permit loans then adopt a very restrictive loan policy effective from now on. That way you do not open the flood gates, which is why many employers do not want to offer them. You should be ok as long as the loan policy is enforced on a non-discriminatory basis.

[Guest Sieve]

I guess I don't understand why an employer which permitted loans from its PSP now objects to amending its 401(k) plan to permit loans to continue to be available from PS $$. Nevertheless, I agree with David that you could grandfather these loans if the 401(k) plan so provides and if the loan is assigned to X as trustee of the 401(k) plan (even if X was also trustee of the PSP).