Minimum payroll for a loan deduction

[30Rock]

If an employee changes status to part time and has an outstanding loan, is there any rule concerning the loan repayment exceeding a certain percentage of the employee's salary? I would think if there is such a state law that it would be pre-empted by ERISA, but the advisor thinks is could be an issue.

Any thoughts are appreciated!

[QDROphile]

How does the advisor express his or her thinking? "There is an issue." "I wonder if there is an issue." "I wonder if there could be an issue? Depending on the statement, the advisor might be asked for clarification or support.

There is certainly an issue about priority of the loan payment relative to other deductions from gross pay that are required or authorized if the pay is insufficient to support everything and there are issues relating to the loan if the amount available is less than the debt service amount.

[30Rock]

When they change status and their paycheck is decreased, what do you do? I assume they will default.

[MoJo]

You know, just because something involves a retirement plan does NOT mean state laws are preempted by ERISA. NOTHING in ERISA deals with payroll deduct as a loan repayment means. The ONLY thing ERISA requires is that it be "a legally enforceable obligation" and that USUALLY means looking to state law to see what is enforceable. If state law says you can't take more than x% out of a paycheck, and that affects the legal enforceability of the obligation, the so be it - ERISA does not preempt as the state law is NOT inconsistent with any requirement of ERISA (a prerequisite of preemption). Indeed - there was such concern over "autoenroll" plans in some places as those jurisdictions REQUIRED "affirmative" consent to ANY deductions from pay, other than those ordered by a court (garnishments, support payments). While the courts NEVER finalized a conclusion on the issue, Congress actually put a provision in one of their pieces of legislation that 1) specifically authorized autoenroll; AND MANDATED THAT AUTOENROLL PROVISIONS PREEMPTS STATE LAW TO THE CONTRARY. Would have been unnecessary under the philosophy that anything touching a plan is preempted.

I'd look into state law FIRST, and determine if there is a state law on point - and then decide how best to proceed Guess wrong and the plan sponsor could have a very expensive legal bill to justify preemption and/or rectify the situation.

Sorry to get on my high horse - but "preemption uber alles" is simply not the answer....

[30Rock]

Thanks. That is why I am asking!

[austin3515]

I am of the opinion that even though permission was granted withhold loan payments the authorization was not irrevocable. So if an employee comes to you and says "I forbid you to withhold money from my pay for this loan payment" what basis would a plan administrator have for refusing to honor this request? Especially if the employee's pay was cut in half due to an hours cut.

Now of course the fiduciary should never make another loan to this person unless the old is repaid (even if defaulted of course!).

But to me if you refuse to discontinue the payroll deductions now it is a garnishment. Why should the plan have such an advantage over a bank who has to get a court order to garnish wages?

[QDROphile]

If payroll deduction authorization cannot be irrevocable (no opinon expessed), would it be a breach of fiduciary duty for the plan adminstrator not to get an assignment of pay to protect against the whims of the participant?

[austin3515]

It would be a breach of fiduciary duty to loan more money to someone with a history of not repaying his/her obligations. But there are no guarantees that any loan will be repaid pursuant to the terms. Again, why should the Plan enjoy greater enforceability rights than any commercial institution? Recall that a plan COULD allow for payments by check, but is not required to do so. So because payment could have been by check, the answer to your question must be "of course it would not be a breach of fiduciary duty."

What you are referring to is a code for a garnishment, is it not?

[QDROphile]

No. A commercial lender will get all the security it can, and the interest rate is often influenced by the qualifity and liquidity of the security. An assignment of pay is security -- agreed by the borrower as a condition of the loan -- not a remedy that is obtained after default (garnishment). It effectively makes the payroll deduction irrevocable and enforceable by the plan, which enhances the fiduciary's expectation that the loan will be repaid and reduces the need for the fiduciary to have to wonder what collection effort is required if the loan is not repaid by voluntary or other unenforced payments.

I agree that plan loans are an exercise in contradictions and a policy travesty, but the the general understanding of plan loans has been clouded by prevailing practices of the big investment providers, tolerated by the IRS and DOL.

[MoJo]

"It effectively makes the payroll deduction irrevocable and enforceable by the plan,"

Q: Have any authority for that? Absent specific authority, I have to go with state law on this one - which in many cases makes deductions from paychecks subject to REVOCABLE consent of the employee..... You could, I suppose, make it a condition of default of the loan should the employee revoke consent, but it's probably going into default anyway....