Rollover of Loan OUT of a Plan

[Gadgetfreak]

A terminating participant has an outstanding loan. He doesn't want it to default, doesn't want to pay it off fully and there is no provision to continue paying after termination. He is rolling over the funds to a different 401k Plan. Is there any provisions available in the original Plan that would allow this to occur? I haven't been able to find anything. Thanks.

[Guest LauraVanSteeter]

I suspect the receiving plan would have to be okay with accepting the loan as well. So, you probably need to look at both sides.

[Gadgetfreak]

I agree about the receiving Plan. But are you aware of any provisions that can be made on the original Plan's side? I don't see any options in the Plan Document to allow for this. Then again, I don't see any options that allow for the Plan to RECEIVE either (though I thought I saw those in the past but I can't be sure). Thanks.

[QDROphile]

Does the plan specify that the distribution must be in cash, or are in-kind distribution allowed? A loan rollover is an in-kind distribution. Sometimes you can finesse with the definition of eligible rollover distribution, which tends to be generic and the plan will expressly provide for direct rollovers of eligible rollover distributions.

P.S. Or amend the plan.

[mbozek]

reg. 1.401(a)31-1 Q-16 provides that the plan admin is permitted to allow a direct rollover of a note for a plan loan to a qualified plan as part of a distribution. If the note is part of the distribution why cant it be rolled over?

[ETA Consulting LLC]

When trying to do this, it's hard to keep everyone on the same page. I would make a series of transactions resulting in the desired effect; no taxation with a loan in the new plan.

1) Directly roll over the cash into the plan of the new employer and offset the loan. Let's say you roll over $10,000 and offset a $5,000 loan.

2) Immediately take a loan from the new plan; $5,000.

3) Roll the $5,000 over, since you have a 60 day period to roll over the loan offset from the previous distribution.

This will only work if you have enough in the cash rollover to secure a loan in the amount needed to cover the original offset. If it can be done, you'd acheive the desired result without getting all the other parties involved.

Good Luck!

[Bird]

The bigger problem is usually getting the receiving plan to accept; first the plan has to allow loans and second it has to accept rolled-over loans (or at least not specifically disallow rolled-over loans). I have an ongoing argument with Fidelity about rolling loans out of one of their plans; they're saying that if one participant terminates employment and wants to roll a loan out to another plan, they can't, but if the whole plan terminates, then they can. Doesn't make much sense to me.

[Gadgetfreak]

Thank you for all the responses. I just want to clarify. We have never allowed for a terminated participant to roll OUT a loan. The receiving Plan is asking if we can amend our Plan to allow it. We have a "relationship" with both Plans so I don't just want to tell the new Plan a straight out "no". On the other hand, I don't want to amend my Plan just to accommodate on person. So I am trying to figure out if there is any provision that is set in a Plan Doc to allow or disallow this. I would prefer to just tell the new Plan that our Document doesn't allow for that type of amendment but I would prefer to know the truth. I haven't found anything yet. Thanks again.

[Kevin C]

Take a look at the plan provisions for direct rollovers and the definition of eligible rollover distribution. Plans are allowed to, but are not required to allow participant loans to roll out. If the document says eligible rollover distributions may be directly rolled over without any language saying that participant loans can not be rolled over, I think your plan allows the loan to roll out. A loan offset is an eligible rollover distribution (§1.402©-2 Q&A 9) and §1.401(a)31-1 Q-16, dealing with loan offsets refers to being able to roll over a participant loan.

As previously mentioned, the other plan doesn't have to allow the loan to roll in, so you have to check both places.