Loan as a rollover from one employer 401(k) to new er 401(k) plan

[Guest pinsall]

I recollect reading soemwhere where a loan can be rolled over from a prior employer's plan to new employer's plan.

If in agreement, what is needed to do this?

Much thanks

Pat Insall

[Guest JimD]

There are two good articles in the Journal of Pension Benefits. Volume 3 Issue 4 Summer 1996 and Volume 5 Issue 3 Spring 1998. Also some PLR's including 9617046. FWIW we have seen this done in merger situations but between totally unrelated employers have not had an employer who wants to try and accomplish such a rollover.

[bzorc]

I have worked with 401(k) plans that have routinely allowed loans to be rolled into their current plans (mainly law firms). What is needed is an amortization schedule of the loan to be rolled over, current balance, and a history of the outstanding balance, to properly calculate the highest outstanding balance if the participant would look for another loan in the future.

[Kirk Maldonado]

bzorc:

Is it your standard practice to require that the participant re-execute loan documents evidencing the fact that the new plan is the plan to which the funds are owed?

[pjkoehler]

Assuming that the promissory note and security agreement are freely assignable, or assignable with the consent of the participant, the trustee of the prior employer's plan and the trustee of the new employer's plan should be able to enter into an assignment of the existing loan, as a result of which, the trustee of the new plan as assignee, obtains the rights and obligations of the trustee of the prior plan. (This is, in effect, a transfer of a plan asset, i.e. the note, in exchange for which the employee of the prior plan is released from the underlying benefit obligation.)

The trustee of the new plan would probably require that the assignment be combined with modifications to the note and security agreement to specify that the loan is secured by the participant's vested interest in his plan account under the new plan.

[bzorc]

Kirk: In the plans that I administered, there was no re-execution of the note at my (the recordkeeper)level. I don't know if the companies I worked with did that on their level, though. I was just told that here's a rollover loan, here are the terms, set it up on your system.

[Guest Jeff Kropp]

One other consideration is payroll deduction authorizations. You may need to have the employee sign another form, authorizing the new employer to deduct wages to repay the loan. State wage laws come into play.

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[Kirk Maldonado]

Jeff Kropp:

Isn't there a good argument that those state laws are preempted by ERISA, based on some DOL Advisory Opinions?