Plan Loans - In-service withdrawal

[Nassau]

My client's loan policy and plan document provides for an in-service withdrawal for a participant who has defaulted on a plan loan.

The loan policy provides the following language: To prevent the continued accrual of taxes and penalties on defaulted loans which may not be foreclosed

because you are not yet eligible for a distribution, you may elect to receive an in-service withdrawal from

the Plan solely for purposes of allowing the Plan to foreclose on your vested profit sharing account balance due to a default on a Plan loan. The maximum amount that can be withdrawn is the amount of the unpaid loan balance, plus any interest owing to date. Further, the withdrawal may not exceed your vested profit sharing account balance minus the amount of Employer contributions allocated to that account during the two-year period immediately preceding the date of withdrawal. The request must be made at the times, in the proper form, and in the manner determined by the Committee.

My questions are as follows:

1. Is the "Foreclosing on Plan Loans" - in-service withdrawal considered a 411(d)(6) protected benefit?

2. If not, what type of lead time would participants need to remove this withdrawal provision?

[Kevin C]

Yes, in-service withdrawals are a protected benefit.

What continued accrual of taxes and penalties after the loan is deemed are they concerned about? There is no further taxation for interest accrual after the loan has been deemed. See 1.72(p)-1, Q&A 19

[QDROphile]

Kevin C's observations are a pointer to the probablility that the provision is not legitimate. You might consider that analysis as a way to eliminate the provision rather than treat it as subject to the protected benefit benefit rules. The suggestion is not for amateurs or the faint-hearted.