Multiple Plan Loans

[fiduciary perspective]

§72(p)(2)(D)(ii) states that "all plans of an employer (determined after the application of such subsections) shall be treated as 1 plan."

Does this mean that if an employer (Public school district) has both 403b and 457 plans available, that there is an aggregate $50,000 available for loans between the two plans? Or is there an exemption that allows one to have $50k borrowed under the 403b, and an additional $50k borrowed under 457?

[TLGeer]

§72(p)(2)(D)(ii) states that "all plans of an employer (determined after the application of such subsections) shall be treated as 1 plan."

Does this mean that if an employer (Public school district) has both 403b and 457 plans available, that there is an aggregate $50,000 available for loans between the two plans? Or is there an exemption that allows one to have $50k borrowed under the 403b, and an additional $50k borrowed under 457?

This is a narrow response. The loans are combined in applying the limitations, and no exemption exists.

More broadly, this does not necessarily "disqualify" the plan, but simply makes the excess loan amounts taxable. The regs. under both 457 and 403(b) provide that as long as a loan is truly a loan based on the facts and circumstances in the regs., an excess amount will not be a banned distribution, just a tax event. This is true no matter how many plans (1, 2, 3 or more) are making loans.

[fiduciary perspective]

That was my understanding as well. Thank you for the confirmation.

[30Rock]

Do you think any type of fiduciary implications come into play under state law? Could the employer be held liable by the IRS or a participant claim that the employer had the duty to monitor the loan program and the loan limits, and by not doing so have jeopardized their retirement savings?

We have employers who refuse to monitor loans when there are multiple vendors, and I am wanting to know if they do not have some liability?

Appreciate any guidance!

[TLGeer]

Do you think any type of fiduciary implications come into play under state law? Could the employer be held liable by the IRS or a participant claim that the employer had the duty to monitor the loan program and the loan limits, and by not doing so have jeopardized their retirement savings?

We have employers who refuse to monitor loans when there are multiple vendors, and I am wanting to know if they do not have some liability?

Appreciate any guidance!

May I ask a preliminary question? Who is "we"?

[30Rock]

"We" is the vendor I work for. You know I cannot go further with that one!

[TLGeer]

The existence or nonexistence of liability is a state law matter, with a lot of different possible answers. However, here are at least some comments.

The participant will have a tax bill, and have it earlier than when distribution would otherwise be made. So, for time periods before the claim is asserted, there is probably a time value of money loss. How that would be measured for time after the claim is asserted is problematic, since employment termination is a distribution trigger event and is inherently uncertain and within the participant's control.

Beyond that, it's all going to be state law. If the sponsor of the 457 is governmental for purposes of 457 and has a trust, trust law may create liability. I don't see much potential under insurance laws if there is an annuity or custodial account under a 457-governmental plan. Otherwise, it would likely be a function of state contract and labor laws and of any specific statutes dealing with 457 plans. There probably are specific statutory provisions.

This is a result of ERISA exemption. ERISA makes plan fiduciaries fiduciaries, but where ERISA does not apply, there has to be something else that creates fiduciary status. Otherwise, no fiduciary equals no fiduciary duties.

Thus, there is no way of answering your question meaningfully without knowing more facts and spending more time. This is particularly the case if you are looking for advocacy or negotiating positions rather than this sort of detached analysis. If you would like to review your situation in a way that allows disclosure of details, let me know.

Tom Geer