Loan

[cdavis25]

A participant goes from full time to part time due to the company reduction in hours. He needs to take a loan to pay bills. He is not at the point of hardship and does not have any distributable event. The problem will be his pay will not cover his loan repayment. The loan repayments are payroll deduction or a check for pre-payment only. Does the fiduciary refuse the loan on this basis or do they have to approve it? If the pay does not cover the loan repayment, will the company just not take anything and default at the end of the cure period? Could this really be considered an unqualified in-service distribution?

[401king]

I don't see how a fiduciary could approve a loan knowing that the participant cannot make the loan repayments. I would not want to put myself in that position.

[GMK]

When uncertain about a legal matter, the fiduciary would get advice from the plan's ERISA attorney. Similarly, in this case, shouldn't the fiduciary seek advice from the plan's banking expert on the appropriateness of approving the loan?

[QDROphile]

No loan should be made without the expectation of repayment, Using payroll deduction as a repayment method is the primary factor in a determination that the loan will be repaid (as well as an administrative aid). Without that support, it is reasonable (or compelling) for a fiduciary to refuse a loan because of the uncertainty of repayment, or the likelihood of failure of repayment.

[cdavis25]

That was my thought QDRO. My concern it treating everyone equally. I think if the paycheck after taxes is not going to be higher than the repayment, the loan should be refused and that goes for any participant. It would be hard for them to dig deeper into the "well he could make a pre-payment to payoff the loan before the cure period is over".

[Bird]

I'll be contrary and disagree, at least partially. I get the part about requiring payments thru payroll deduction. But I don't think you can say "well I'm not giving you a loan because the policy says payments are thru payroll deduction and your pay won't cover it."

Our policy says "...your loan will be approved if the Plan Administrator determines you have the ability to repay the loan, the loan is adequately secured and the loan meets the other requirements set out below."

If you're going to reject it the basis should be inability to repay, not inability to pay through payroll deduction. It might seem trivial but I see a difference.

And I would approve it anyway. I do not see the IRS hassling over this at all. At least he has some pay and maybe there is a chance of increased hours or some other way of getting payment. But that's just me.

[QDROphile]

I think it would be a breach of fiduciary duty when the loan went into default unless the fiduciary went to extraordinary lengths to determine full payment could be reasonable expected despite the apparent lack of current projected income to do so.

Making a loan that is expected to default is effectively allowing an in-service distribution, and if the participant is not otherwise eligible for an in-service distribution, it could be a disqualification event if the loan in fact goes into default and is not cured before deemed distribution.

Also, there is following plan terms, and projecting a shortfall in payroll deduction while approving a loan does not look good. I would guess that the majority of plans allow regular payment only through payroll deduction. Are you suggesting that those terms are improper limitations, so that loans should be approved even though the plan will have to deviate from plan terms to accommodate loan payments?

[Bird]

I said "If you're going to reject it the basis should be inability to repay, not inability to pay through payroll deduction." And I respect that there is in fact a basis for denying the loan for inability to pay.

Additional comments were about being practical. I understand where you're coming from.

[Peter Gulia]

What do BenefitsLink mavens think about writing the plan documents so that - for any participant that meets the prohibited-transaction exemption of ERISA 408(b)(1) and the tax-treatment conditions of Internal Revenue Code 72(p) - taking a participant loan is solely on the participant's direction with every fiduciary lacking discretion and bound to follow a proper direction.

If those are the plan's provisions, doesn't a fiduciary get the ERISA 404© defense?

[QDROphile]

Your conditions swallow the question. A fiduciary does not have discretion about the issuance of a loan outside of determining if the loan meets the legal and plan document requirements. Everything in this topic relates to legal requirements. Making some of the required determinations may require some judgments and certain designs may require more judgment calls than others.

[Peter Gulia]

Yes. But (as long as the loan, when made, is "adequate secured" by a provision to adjust the participant's account) neither ERISA's 408b-1 rule nor the tax Code's 1.72(p)-1 rule requires a showing that the participant has the means to repay the loan.

If the plan allows a participant loan in these circumstances, shouldn't the employer set payroll to take as much of the amortized repayment amount as can be taken from each period's pay without failing to withhold required wage and withholding tax amounts, even if this results in a net paycheck of $0.00 or $0.01?

Will the hardship claim arrive a few weeks later?

[401_noob]

Could it be argued that the participant is on a bona fide leave of absence and thus the loan payments could be suspended (1.72(p)-1 Q&A 9)?