Loan from a terminated 401(k) plan.

[jkharvey]

Can a participant take a loan from a terminated 401(k) plan? The plan has filed for a FDL on the termination but can't distribute balances until letter has been received. Employee wants a loan in the meantime. I've not been able to find any specific cite against it. Any suggestions?

[Guest Dook]

You could try to explain that it does not constitute a bona fide loan. Due to the status of the plan, there is no reasonable expectation that the loan would be paid off in accordance with the terms of the note. that is, unless the term of the loan is for a period less than the time it is expected to take to obtain the determination letter.

[Guest svatty]

In the deals I've worked on, I have seen clients choose both options. The main issue is not a legal one (i.e., it isn't prohibited to offer 401(k) plan loans from a terminated plan) but rather is whether the terminated plan administrator will permit new loans. Fidelity will permit new loans from a terminated plan, while awaiting a determination letter, but only after pressure has been applied by the "client" acquiror.

It gets complicated in arranging payments from the new acquiror payroll to the old plan's trust (but most likely you have this issue anyway with loans that were in place when you terminated the acquired plan).

Short answer, call your terminated plan TPA and see if they will allow it. It is not "against the law" to allow such loans, but most likely, administratively, you will not want to venture down that road.