Loans for sole proprietorship

[Cynchbeast]

We have encountered an issue with loans for a sole proprietor who has other employees. Per adoption agreement, loans must be repaid through payroll deduction. However, the owner doesn't get W-2 or regular payroll and so can only make payments directly. But on the surface, this appears to be discriminatory because the other participants don't have the option of paying say quarterly by check.

Would the IRS likely look at this as discriminatory? How have others addressed this issue?

[Bird]

Well, I don't think it follows that because the plan says that loans must be repaid through payroll deduction, that you can't make a loan to someone who is an active participant but not on payroll. If he meets all of the conditions for receiving a loan, then you do the best you can to accommodate repayments. (And I don't think repayment methodology should be in the AA, fwiw.)

[Cynchbeast]

My mistake - loan repayment is not in the AA, it is in Loan Procedures. Sorry.

Loan Procedures specify repayment through "payroll deduction from each regular paycheck." We use Datair and the question that drives this is a Yes/No question; a No answer would result in "Payments will be made by check or other method prescribed by the Plan Administrator."

So a Sole-Proprietor who does not get a regular check cannot comply with the payroll deduction. If we go with the No answer, he still has to treat himself different than other participants if he requires them to pay by payroll deduction.

So I repeat my question - is this actually discriminatory and how have others dealt with the issue?

[BG5150]

To me, this is an administration issue.

Just amend the loan program to read something like:

Loan payments will be deducted from each regular paycheck. For those participants who do no receive a regular paycheck, other arrangements will be made, but in all cases payments will be made in accordance with the amortization schedule for the loan.

Just think. How would you treat someone who only received commissions at irregular intrevals as the only compensation? Will you tell them they can't take a loan unless they get a paycheck every week?

[Belgarath]

I may be foolishly optimistic, but even if the loan procedure weren't amended (and I agree it should be) I have trouble imagining that most IRS auditors would cause trouble over this one.