Rolling over loans to new plan

[Lori H]

If Plan B is merging with Plan A due to a purchase and Plan B has loans, Plan A only needs to allow for rollovers and loans to accomplish this correct? Plan B, which is terminating, does not need to amend it's plan.

[Lou S.]

Is plan B terminating or merging?

If plan B is merging with Plan A then I believe Plan A will have to accept the loan as a participant asset. Unless there is a provision in the loan documents that can accelerate payment of the loan for the participant in Plan B upon merger.

If plan B is terminating the loan will become due and Plan A may or may not accept the loan note in kind as a rollover, many plans will not accept a participant loan as a rollover though some will in this case to keep participants happy.

[EBECatty]

If it's terminating, you also want to check Plan B to make sure it allows distributions in-kind or loan rollovers. Many pre-approved plans limit distributions to cash only; the loan note that gets assigned is considered an in-kind distribution and direct rollover to Plan A. This is especially true if Plan B will file for a DL after termination and you have to support the in-kind loan rollover as a permissible form of distribution. Most loan policies also result in an automatic default upon termination of employment or termination of the plan, so I would confirm the policy is consistent with what you're trying to do as well.

[Lori H]

Plan B is in fact terminating and the sponsor of Plan A is requesting a DL for Termination. Plan B's plan doc is a pre approved plan. Are you saying that Plan B's loan policy info should be amended, if necessary, to incorporate in kind distribution of loans?

[EBECatty]

The adoption agreement will be more important, but I always request conforming language in the loan policy as well if possible. You can add in a catch-all at the end of the loan policy along the lines of "notwithstanding anything else in this policy, loans may be distributed in-kind and directly rolled over to the [acquirer's] plan to the extent accepted by the trustee of such plan."

Line 17(f) on the Form 5310 asks whether any distributions will be made in-kind. If yes, you have to attach an explanation and reference the plan section allowing in-kind distributions. The Internal Revenue Manual section on plan terminations (7.12.1.14.2) also directs the reviewer to examine the plan term that allows in-kind distributions, so you need to make sure the terminating plan's adoption agreement allows in-kind distributions.

[Lori H]

The adoption agreement will be more important, but I always request conforming language in the loan policy as well if possible. You can add in a catch-all at the end of the loan policy along the lines of "notwithstanding anything else in this policy, loans may be distributed in-kind and directly rolled over to the [acquirer's] plan to the extent accepted by the trustee of such plan."

Line 17(f) on the Form 5310 asks whether any distributions will be made in-kind. If yes, you have to attach an explanation and reference the plan section allowing in-kind distributions. The Internal Revenue Manual section on plan terminations (7.12.1.14.2) also directs the reviewer to examine the plan term that allows in-kind distributions, so you need to make sure the terminating plan's adoption agreement allows in-kind distributions.

Thank you very much EBEcathy. this is very helpful. The custodian of the current plan didn't really recommend "rolling over" loans to the new plan as it's a manual process.

[Lori H]

Ok, now the plan is being merged into the parent company as they have determined it is a controlled group situation. So Plan B will be frozen for a period of time until all the proverbial ducks are in a row. The new company keeps referring to allowing participants to make loan payments via "coupon book or ach". I have never heard of this option. Have you?

[QDROphile]

It is uncommon because of administrative complexity, such as monitoring for delinquent payments, and the ability of a participant to elect to default. There is nothing wrong with payment arrangements other than payroll deduction, but they increase potential concerns for the fiduciary..

[ESOP Guy]

It is uncommon because of administrative complexity, such as monitoring for delinquent payments, and the ability of a participant to elect to default. There is nothing wrong with payment arrangements other than payroll deduction, but they increase potential concerns for the fiduciary..

Other possible issues are bounced checks and related fees. Is the person or place receiving checks equipped to handle them in a way the funds aren't lost of stolen? How do you transmit the checks existence/receipt to the record keeper/TPA. (I once worked with a plan where the sponsor got the checks scanned them and sent the scans to us at the TPA firm so we knew the payment was made.)

I have seen a few plans allow payment outside of payroll deduction but it is labor intensive and difficult. If you agree to this make sure your fees cover your costs.