Voluntary Deemed Loan

[Guest NGG53]

I have a participant who cannot pay on thier loan and wants to have it deemed distirubted, even tho they are an active participant. I have also heard that some states do not not allow a loan to be irrevocable.

[12AX7]

In my opinion, it could be a violation of the terms of the plan, and a breach of fiduciary responsibility to stop payment of the loan. I've heard others argue against my opinion, especially where the participant would otherwise have a distributable event. If no distributable event is present, I would not default the loan if the participant was still in service with the plan sponsor.

[Bird]

I'm in the camp that believes you can't force the participant to keep making loan payments - they just tell payroll to stop taking the money out of their pay (assuming it's done through p/r deduction; if they're writing checks then they just stop!). The loan defaults as of the end of the quarter following the first missed payment.

[12AX7]

Let's take this a step further. What if the loan were from a Salary Deferral source? I would even more hesitant to deem a distribution before 59 1/2, if the participant was still in service.

[D Lewis]

Let's take this a step further. What if the loan were from a Salary Deferral source? I would even more hesitant to deem a distribution before 59 1/2, if the participant was still in service.

If no distributable event is present, I would not default the loan if the participant was still in service with the plan sponsor.

Maybe I'm a little dense, or missing what you are saying, but why are you saying there must be a distributable event to deem the loan? If the participant stops paying it's either an actual distribution or a deemed one depending on if they have a distributable event.

Regardless of the source of the loan, if they stop payment, we have to deem it at the end of the cure period - age doesn’t come into it - they stopped payment. You may not be able to offset it, but you must deem it. No?

[Guest NGG53]

Just to clarify, this participant is making loan payments through payroll deduction and needs plan sponsor approval for payroll to stop the loan payment, even tho the employee is active.

[Bird]

Just to clarify, this participant is making loan payments through payroll deduction and needs plan sponsor approval for payroll to stop the loan payment, even tho the employee is active.

There was another thread on this but it's easier to repeat what I (think I) said there than to find it. I think you have to look at the different relationships in this issue. You've got a participant who borrows from the plan and agrees to make payments by payroll deduction. That same participant is also an employee who can, I think, voluntarily tell the employer to stop taking those payments from his paycheck.

I think that some people are suggesting that a loan policy that says "loan payments will be made by payroll deduction" means "you can't ever stop making those payments as long as you are employed." I don't think that's correct. You have very formal rules for just such an event telling you when to deem the loan as distributed.

[Guest Sieve]

Bird --

Do you know if EBSA has taken a position (with respect to participnat loans) as to whether ERISA preempts state laws which allow an employee voluntarily to cease payroll withholding?

[Bird]

Do you know if EBSA has taken a position (with respect to participnat loans) as to whether ERISA preempts state laws which allow an employee voluntarily to cease payroll withholding?

No, I don't. I'm not sure what in ERISA would force someone to make loan payments though.

[masteff]

There was another thread on this

Here are a couple:

http://benefitslink.com/boards/index.php?showtopic=35828

http://benefitslink.com/boards/index.php?showtopic=42850

Useful search: +loan +default +state +law (putting a + in front of each term makes it find "all" terms rather than "any" terms)