Loans from plan sponsor being merged with new company

[Lori H]

Company A just became a wholly owned subsidiary Company B. Comp A's plan has a loan provision. B's does not want A's outstanding loans in their plan. The actual date that A's employees become B's employees won't occur until around the start of the 2nd quarter 2016. Can A's plan be amended to allow for the loans to be repaid by personal payment, not via payroll deduction, so that it will not be a taxable event?

[QDROphile]

It appears that the Plan A is being maintained as a frozen plan. Personal payment is a permissible method if allowed by plan and administrative terms, So is payroll deduction by Employer B with the deduction forwarded to Plan A. The deductions would have to be authorized by the individual employees, but that may be a welcome way to pay the loans. If personal payments are allowed, Plan A should also allow the personal payments to continue even if the participant terminates employment with Company B. Appropriate plan terms are critical.

[ESOP Guy]

I would go back and double check the promissory notes also. Back when I worked 401(k) and ESOPs some of the 401(k) TPAs I worked for wrote the promissory note such that if the note was not paid back via payroll deduction the note was immediately due. It was not a plan term that was an issue. However, a promissory note is a contract and to pay the note any way other then via payroll deduction was a breach of contract.

(edits to fix a few unclear sentences)

[Lori H]

Plan A is currently not frozen, but it appears as if it will be frozen come second quarter when they become employees of Company B. I suspect if Plan A is frozen they can continue to make loan payments via payroll deduction or personal payment, if Plan A is amended to allow for it, since they are not technically "contributions"?

[QDROphile]

The comment about the promissory notes is a very good one because terms of the notes are often forgotten. If the notes provide for acceleration of the loan if the Company A payroll deduction ceases, consider that usually lenders may waive acceleration and default, whether or not there are express provisions. The plan may be able to waive on the condition that payments are made timely in a manner acceptable to the plan. If payment fails at some point, the loan accelerates.