Eligible for Loan?

[BTH]

A 401(k) allows for participant loans, which are repaid through payroll deduction. An employee who is out on disability leave and having financial difficulties would like to take a participant loan.

The loan (at least initially) cannot be paid via payroll deduction since they aren't working and it's possible that the individual won't return to active employment.

The Plan's loan program includes language indicating that the Plan Administrator should check the creditworthiness and ability to repay in determining whether to approve a loan. This might lead the Plan Administrator to reject the loan request. But, we don't want a situation where the Plan is not making loans available on a "reasonably equivalent basis" and possiblity discriminating against an otherwise eligible employee because they are out on disability.

Are there any loan rules that would lead one to lean one way or the other in this situation?

Thanks.

[pmacduff]

Not sure if this helps you - but the loan policy that our clients use states that all loan repayments must be made via payroll deduction. A participant out on disability cannot pay via payroll deduction and therefore is not eligible to take a loan because they cannot make the repayments according to the loan policy. The policy also has the language that you mention regarding "creditworthiness and ability to repay". We haven't had any problems with this thus far and have had several plans audited (which of course entailed review of the loans as well as the Plan Docs).

Just another thought...does the plan allow for hardships? I find that since participants are out on disaibility for medical reasons; they can more often that not meet the "unreimbursed medical" hardship safe harbor.

[Bird]

fwiw, I'm not sure I agree with the concept that because the loan policy calls for payroll deduction repayments, a loan can't be made to someone who isn't on the payroll. I'm not a lawyer but I don't think that's a legal basis for denying a loan; it's just a procedural requirement to be followed once the loan is issued. I would not deny a loan to a member/partner of an LLC who is not a payroll employee.

You might want to double/triple check the loan policy. Ours say "If you are an active Participant in the XYZ Plan..." (My emphasis on active.)

[BG5150]

If the loan porgram says payroll deduction only, then how do you handle a loan to an owner?

Besides, the loan program can be changed at any time.

[Bird]

If the loan porgram says payroll deduction only, then how do you handle a loan to an owner?

I just do it. Typically plans are on a platform and payments are made through a debit from the company checking account, and we have them write checks to the company.