Participant Loans

[52626]

Can a plan sponsor limit non residential loans to 50% of the vested account balance up t0 $30,000

and residential loans to 50% of the vested account balance up to $50,000?

They wanted to reduce the 50% for non residential loans, but that I would say is a no!! Just not sure if the IRS allows the plan sponsor to reduce the maximum $50,000 amount.

Thank you

[Lou S.]

The IRS maximums are just that, maximums. There is nothing that prohibits a Plan Sponsor from setting loan terms less than the statutory maximums as long as it is done in a nondiscriminatory manner.

[ESOP Guy]

The problem with this idea is how do you test the benefits, rights and features?

If a HCE takes a max residential loan and a NHCE gets limited to $15k how would you detect that to prove it passes the nondiscrimination test?

This just strikes me as a testing mess from a practical point of view. You have to figure out every year which loans have been capped and which ones haven't been capped under the new rules and test that reality.

[BG5150]

Residential loans are a bad idea in most cases.

Thus endeth my non-contribution to the thread.

[Lou S.]

The problem with this idea is how do you test the benefits, rights and features?

If a HCE takes a max residential loan and a NHCE gets limited to $15k how would you detect that to prove it passes the nondiscrimination test?

This just strikes me as a testing mess from a practical point of view. You have to figure out every year which loans have been capped and which ones haven't been capped under the new rules and test that reality.

Wouldn't they be different features? NHCEs presumably would have same access to residential loans as HCEs. Though I think from an admin stand point I can't see why they would want to add complexity by having different limits.

But BG5150 echo's my sentiments on residential loans longer than 5 years from retirement plans. Participant loans are bad enough without potentially offering 30 year participant loans that I've occasionally seen in some plans.

[ESOP Guy]

The problem with this idea is how do you test the benefits, rights and features?

If a HCE takes a max residential loan and a NHCE gets limited to $15k how would you detect that to prove it passes the nondiscrimination test?

This just strikes me as a testing mess from a practical point of view. You have to figure out every year which loans have been capped and which ones haven't been capped under the new rules and test that reality.

Wouldn't they be different features? NHCEs presumably would have same access to residential loans as HCEs. Though I think from an admin stand point I can't see why they would want to add complexity by having different limits.

But BG5150 echo's my sentiments on residential loans longer than 5 years from retirement plans. Participant loans are bad enough without potentially offering 30 year participant loans that I've occasionally seen in some plans.

I hadn't thought of it in terms of the type of loan being a different feature.

How far can your parse that idea?

Is allowing a $1k to $2k loan being only 1 year long and a over $2k loan up to 5 years different features or are they both loans? How different do the features have to be to be a new benefit rights and feature?

I could see someone just as rationally saying loans is the feature which is the assumption my first comment was based on. But I see your point-- interesting idea.

[masteff]

Pardon if I'm missing some aspect since I don't deal routinely w/ testing like some of ya'll do, but I thought BRF testing had to do more with current and effective availability, not utilization (except to the extent that utilization might prove lack of effective availability). http://benefitslink.com/boards/index.php?/topic/39583-er-matchbrf-issue/

What aspect of a separate limits on regular vs residential loans would make either type of loan (or loans in general) less available to NHCEs?

[ESOP Guy]

Pardon if I'm missing some aspect since I don't deal routinely w/ testing like some of ya'll do, but I thought BRF testing had to do more with current and effective availability, not utilization (except to the extent that utilization might prove lack of effective availability). http://benefitslink.com/boards/index.php?/topic/39583-er-matchbrf-issue/

What aspect of a separate limits on regular vs residential loans would make either type of loan (or loans in general) less available to NHCEs?

Here is my thinking in the form of an extreme example to make my point obvious.

What would the IRS or DOL's reaction be if 100% of the HCEs took out $50k loans to purchase a house and 100% of the NHCE's took out $30k loans but had just the legal limits been put in the plan could have taken out $50k loan paid back over 5 years? I can imagine having an uncomfortable conversation about discrimination.

Ok, my fact set is rather fake in how often will 100% of either group be able to do what I said. But how would you know if you didn't restrict people's ability to take out a max loan isn't discriminatory without reviewing at least the loans taken out every year and possibly every loan outstanding?

I will admit I have never researched this question so I can't say if it is every loan taken out in any given year or every loan outstanding. But taking out a loan and its limits is clearly a benefit/right/feature of the plan subject to the nondiscrimination rules. So to me the debate is over how you test this b/r/f not if you have to test the b/r/f.

[Lou S.]

I think that because the home loan purchase is an exception to the 5 year payback rule specifically listed in 72(p), they are sufficiently different to be treated as separate features. In fact most of the plans we work with don't allow loans more than 5 years even if for home purchase, they just don't want the hassle. Though most of our plans are small plans so that might have something to do with it.

[Belgarath]

Maybe I'm misunderstanding the proposed loan program, but I'm having a hard time seeing why this is perceived as a potential Nondiscrimination testing problem.

The 50% up to $30,000 applies to both HC and NHC. If a HC wants to take a $35,000 loan for a purpose OTHER than a residential loan, he can't do it.

The 50% up to 50,000 increased limit for residential loans is available for both HC and NHC. If a NHC has an account balance of only $40,000, the NHC can still take a residential loan for $20,000. If their account balance is $80,000, a $40,000 residential loan is available to them. Same applies to HC.

The only way you would have a problem is if residential loans are not allowed for amounts of less than $30,000, but are available for loans in excess of $30,000. THEN you'd have a problem.

I don't see any problem here. (although I think it is a ridiculous provision, but that's a personal preference)

[Guest A_Dude]

Setting a ceiling for everyone, is not discriminatory. Applying the ceiling to a specific class; maybe. Setting a floor; highly likely. As long as their are no HCE's with "current" (I don't care about the past)residentianial loans above the ceiling there should be no issue, in setting one.