Principal Reduction - Participant Loan

[austin3515]

I was surprised to learn that Great West has a "principal reduction form" for participant loans. the option reads as follows:

"Principal Reduction Method - You can elect to send a partial prepayment to reduce the principal balance of your loan. To elect this option, mail this completed form and your payment made payable to Great-West Trust Company, LLC to the address indicated below. Consider submitting payment by certified check or bank money order. The payment received will be applied first to the current payment due and then to the outstanding principal balance."

I believe this would violate the level amortization requirement of a participant loan. What do you say? We've always told participants partial payments are not allowed.

[QDROphile]

You told them that because administrators do not like dealing with partial prepayments and there is not enough demand for partial prepayments to overcome that resistance. In most plans prepayments are not allowed, but not because there is a compliance problem. That is similar to accelaration of loans at termination. It is done out of administaritve convenience, not compelling legal concerns. I am not saying that either common practice is bad. Do you also tell participants that a hardship withdrawal will be followed by a 6 month suspension of elective deferrals? That is a common practice that I think is bad.

[Lou S.]

I've always took level amortization to mean, not less frequently then level amortization.

That is you can't have negative amortization, ballon payments, interest only or similar but I see nothing wrong with making excess payments to reduce principal.

Though much like making excess payments on your mortgage it doesn't reduce your future scheduled payments just pays the loan off soome than originally intented.

[austin3515]

1) "Do you also tell participants that a hardship withdrawal will be followed by a 6 month suspension of elective deferrals?"

Yes, because it is required if you're using the safe harbor standard???

2) Why doesn't the partial pre-payment violate the level amortization requirement? It doesn't sound level to me if they can make non-uniform payments on a "willy-nilly" basis?

[austin3515]

Though much like making excess payments on your mortgage it doesn't reduce your future scheduled payments just pays the loan off sooner than originally intended.

I think I like this explanation very very much. Based on this I can see how you could argue that the amortization is still level.

[shERPA]

The level amortization requirement is a minimum requirement. Paying down principal in advance doesn't change the required payment it just accelerates the payoff date. Not a problem at all. Nice to see a vendor has a process in place to make it easy.

[austin3515]

I cannot say enough good things about Great West. They are the gold-standard.

[BG5150]

Do you also tell participants that a hardship withdrawal will be followed by a 6 month suspension of elective deferrals? That is a common practice that I think is bad.

[hijack]

Why is this bad if the plan document calls for it?

[/hijack]

[12AX7]

I have forms that a participant must sign indicating the same.

[masteff]

I believe this would violate the level amortization requirement of a participant loan.

Correction: substantially level amortization requirement. A subtle difference but one that has been taken to allow for a few but not many extra payments.

[QDROphile]

BG5150: I believe it is a bad design choice, unlike the two other design choices that I mentioned, which are more tolerable to me.

The main point I was making is that interpreting TPA statements about what is and what is not OK must disinguish between what is and what is not OK under the law and what is and what is not OK under the plan. Those can be two very different things, and they often get confused. Too often, the common convention is considered to be the only option. In my experience, the 6-month suspension is often believed to be the only possible design for hardship withdrawal and not though is given to the alternative. The insistance that this is the only way annoys me greatly in an of itself, all the more so because I believe it is a pointless restriction. I was heartened by austin3515's perfectly correct and complete response and I have no quarrel that it was neutral about value.

[BG5150]

1) "Do you also tell participants that a hardship withdrawal will be followed by a 6 month suspension of elective deferrals?"

Yes, because it is required if you're using the safe harbor standard???

Keep in mind, that 6 months is the MINIMUM suspension time, and the time can be longer. If the plan is a safe harbor matching plan, the time period is MUST be 6 months.

[K2retire]

I was surprised to learn that Great West has a "principal reduction form" for participant loans. the option reads as follows:

"Principal Reduction Method - You can elect to send a partial prepayment to reduce the principal balance of your loan. To elect this option, mail this completed form and your payment made payable to Great-West Trust Company, LLC to the address indicated below. Consider submitting payment by certified check or bank money order. The payment received will be applied first to the current payment due and then to the outstanding principal balance."

I believe this would violate the level amortization requirement of a participant loan. What do you say? We've always told participants partial payments are not allowed.

I'd love to know where you found this form. Great-West has always told me that no prepayments were allowed unless it is to pay the entire outstanding balance.

[austin3515]

Just call them and ask for the form I mentioned above (Principal Reduction Form). They told me about it.