Loan payments for termed ee's

[WCC]

After much searching, I have a question regarding a terminated employee with an outstanding loan.

The loan policy does not require loan payments to be made via payroll. It is my understanding that in most cases loans go into default due to the loan policy requiring payment via payroll deduction, not necessarily because of termination alone. Since payments are not required to made via payroll, can a terminated employee continue making loan payments to avoid default? Are there any regs that would allow the sponsor to not accept a personal check for loan payments? I understand this is inconvenient, a hassel, not ideal, etc.

Thank you

[BG5150]

What does the loan agreement say?

Ours usually say that the loan will be due and payable upon termination of service.

[ETA Consulting LLC]

This is not a Regulatory issue, but a loan policy issue. If the loan policy does not require you to remain employed in order to continue to maintain the loan (or state that payments must be through payroll deduction), then you would be able to continue to make payments beyond termination. The loan policy (loan terms) is the only means for answering this question for this particular plan.

Good Luck!

[WCC]

What does the loan agreement say?

Ours usually say that the loan will be due and payable upon termination of service.

I cannot get a reponse from the prior TPA after multiple requests for the loan policy. The participnat terminated 4 years ago and has been making payments. The participnat sent me all their loan docs and there is no reference to what happens upon termination.

[ETA Consulting LLC]

I cannot get a reponse from the prior TPA after multiple requests for the loan policy. The participnat terminated 4 years ago and has been making payments. The participnat sent me all their loan docs and there is no reference to what happens upon termination.

It appears that you have already decided that no one would ever be allowed to continue to make payments beyond termination of employment; and that appears to be your default. I say this to illustrate that there is always a default position (what to do when you don't get your question answered). In this instance, do you assume that the loan policy allows continue payments beyond termination of employment since this is how it is being administered; and draft the new loan policy to continue with that operation? Or, do you take a default position that unless they show the language allowing continued payments, you'll assume it didn't exist and then file a VCP submission to correct that this wasn't how it was operated. Questions: Is the plan on an adoption agreement? Are the loan provisions written within the Basic Plan Document?

Good Luck!

[WCC]

I cannot get a reponse from the prior TPA after multiple requests for the loan policy. The participnat terminated 4 years ago and has been making payments. The participnat sent me all their loan docs and there is no reference to what happens upon termination.

It appears that you have already decided that no one would ever be allowed to continue to make payments beyond termination of employment; and that appears to be your default. I say this to illustrate that there is always a default position (what to do when you don't get your question answered). In this instance, do you assume that the loan policy allows continue payments beyond termination of employment since this is how it is being administered; and draft the new loan policy to continue with that operation? Or, do you take a default position that unless they show the language allowing continued payments, you'll assume it didn't exist and then file a VCP submission to correct that this wasn't how it was operated. Questions: Is the plan on an adoption agreement? Are the loan provisions written within the Basic Plan Document?

Good Luck!

Very well said, that is my exact scenario. The adoption agreement only states the following:

Loans. This Paragraph shall apply to the extent that the Plan allows for loans. The provisions of Code

Section 72(p) and Treas. Reg. 1.72(p)-l shall apply to the Plan and are hereby incorporated by reference.

This wording obviously does not solve my problem. I will continue to try to obtain plan doc and the loan policy (if there is one).

Thanks

[Kevin C]

The participant terminated 4 years ago and has been making payments.

With the plan allowing this terminated person to make loan payments with personal checks for 4 years, I wouldn't want to be the one to over-rule that decision. Changes to the loan program would apply to later loans, but they don't change the terms of an existing loan. How long until the loan is scheduled to be paid off?

Now, if this person sent a check that bounced, I think the plan would have an obligation to insist on a form of payment that won't bounce.

[WCC]

The participant terminated 4 years ago and has been making payments.

With the plan allowing this terminated person to make loan payments with personal checks for 4 years, I wouldn't want to be the one to over-rule that decision. Changes to the loan program would apply to later loans, but they don't change the terms of an existing loan. How long until the loan is scheduled to be paid off?

Now, if this person sent a check that bounced, I think the plan would have an obligation to insist on a form of payment that won't bounce.

It is a 30 year home loan and all payments have been made timely. I really don't want to override what has happened nor do I really want to default the loan. I would just like to find some documentation so that if i have to prove why this was allowed, I can do it. At the same time I don't want to perpetuate an error, if it was an error.

[WCC]

I think the TPA was reading this board I just received the loan policy "the loan will become payable in full on your termination of employment" and "payments will be made through payroll deduction from each regular paycheck".

Thanks for the fast responses.

[BG5150]

Was that the loan policy in effect when the loan was taken?

Where are the original loan agreements the participant signed?

[WCC]

Was that the loan policy in effect when the loan was taken?

Where are the original loan agreements the participant signed?

Yes it was in effect when the loan was taken. I have the signed loan docs. The signed docs don't say anything about payroll deduction nor the termination provision. This is why the participant is so upset.

[ESOP Guy]

While it sounds like you have your answer allow me to add one thing. Back when I did 401(k) plans not only did the policy say repayment was via payroll most of the time but the promisory note said the note was due upon termination.

That was done so it was a matter of contract law (as opposed to pension law) that the note was due.

Edit:

You replied while I was writing my comment. I sounds like the promisory note doesn't require the note to be paid.

[BG5150]

So, in other words, there isn't a "legally enforceable agreement" that says it's due on termination. Code says that the agreement has to include the "repayment schedule." Would that also mean: if and when the loan would be due and payable

(right?)

[WCC]

So, in other words, there isn't a "legally enforceable agreement" that says it's due on termination. Code says that the agreement has to include the "repayment schedule." Would that also mean: if and when the loan would be due and payable

(right?)

The loan agreement they signed did have the amortization schedule, but it did not reference what happens at termination. Are you suggesting that the loan policy would not be sufficient to show that the loan was due at termination since the agreement did not mention it??

[ESOP Guy]

WCC:

If I understand it correctly the policy violation happened 4 years ago- that is when this person terminated and has been making payments since then.

Can you really enforce the loan policy 4 years later? At some point doesn't the sponors actions of ignoring the policy become an "implied amendment" to the policy?

If I understand the facts correctly I think you are standing on thin ice. I think the best answer (not easy answer) is to change the policy to say anyone who terminates as of today has to pay the loan in full. Get the Promisory Note to reflect that on new loans and so forth. But for this existing loan precedence of the last 4 years has to be honored.

I will admit that is my opinion. I don't think this is black and white here is the rule in the regs I can point to kind of issue. But to change after 4 years seems arbitrary to me. I guess I am saying I am with Kevin C on this one.

[Tom Poje]

one item I don't see mentioned:

how were other terminees with loans handled?

And if the person in question here was an HCE and he was allowed to continue payments and others weren't then it fails the smell test.