loan admin fees

[Beemer]

A plan sponsor wants to start charging participants $75 to initiate a loan. They want the participants to pay the $75 by payroll deduction and forward that to the TPA. Are there any issues with paying the fee by payroll deduction rather deducting the fee from the account?

Thank you for any replies.

[Lou S.]

Unless you run into state law issues debiting the fee from the employee's pay check I don't see an issue, especially if it is disclosed with the loan application process.

[Beemer]

Thanks!

[chc93]

We have seen instances where the loan amount is increased by the loan initiation fee. The actual loan amount is paid to the participant, the loan fee is paid to whoever...

[hr for me]

Not directly the question that you asked, but the participant (in most states) would need to sign a payroll authorization for the deduction and then you would need to give payroll time to process. Doing it this way could add on 2-3 weeks of processing time to get the loan depending on when the next payroll is run and if you wait to make sure the deduction happens and that the money is transferred to the TPA.

What happens if you have an employee on unpaid leave who requests a loan where the fee can't go through payroll? Who is going to check that the participants wages are high enough to pay the loan fee? What happens if their child support, health insurance and 401k deferrals eat up all their net income, etc? Someone is goign to have to verify that or wait for it to be verified during the payroll processing. And you would be surprised who doesn't have the net income to have it subtracted.

I can tell you that payroll probably won't be happy about adding the deduction (programming, accounting, etc).

Honestly I prefer the method where the fee is added to the whole loan and then the employee gets a check for the net, so that it stays out of the payroll process altogether (but I am a strange duck who does both HR/Benefits and payroll and has been more involved in there interaction over the years and sees those payroll processing issues more than most benefits professionals, so I tend to want to bring them to the forefront early) Or the method where they write a personal check. Why bring payroll into the process?

[Beemer]

If the loan repayments are by payroll deduction, why do you think the fee processing would add another 2-3 weeks? (I am not opposed to paying the fees directly out of the participants accounts, but the plan sponsor is asking about payroll deduction). And if they require a $1,000 minimum balance for a loan, and you need $75 from payroll to process the loan, some participants may not be eligible for a loan, but that would not make this discriminatory, would it?

[hr for me]

No I don't see a discrimination issue (unless you take into account some outliers like FMLA leaves), but do see a processing timing issue. For example, we pay biweekly on every other Friday. To have anything posted to that check, payroll needs the information NO later than the previous Friday to input it prior to payroll running on the Monday of the paycheck week. Each company/payroll is going to have a set schedule that they run payroll on. Some may be more flexible/quicker, but generally they also have to deal with a few days for direct deposit timing/mailing paychecks, transferring data out, etc.

So, in a worst case example, if someone were to request a loan on Tuesday October 25th and payroll was run on Monday October 24th to be paid the 28th (today), they would have to wait until the paycheck dated November 11th to have the deduction come out (assuming the request made it through that transfer process either automatically from online loan request or by paper/entered by hand), then processed on the 11th's payroll and then a day or two (or more) to forward it to the TPA for the TPA to then process the transaction through its system and check to see it was paid prior to processing the loan. I doubt theTPA can see payroll reports and can look at them prior to actual payday (but after payroll processing). We never got information back in the day until the client sent all data via floppy disk/online data transfer/upload (which might mean extra programming on that side for payroll to be able to send that back to them electronically).

Unless the employer is going to assume the deduction will happen correctly and not wait on payroll but just put it through on the next check. But that gets into a small risk of it not getting paid by the participant. Yes $75 is a pretty small amount that should go through, but what happens if it doesn't? What happens if that person is on unpaid leave and never returns and never gets another check? Are you going to deny a loan because someone is on FMLA? You can't unless you deny loans for everyone on every type of leave or you would be discriminating illegally for the employee taking FMLA. Who is going to eat the $75 fee? Or does the loan just not happen? Does the TPA wait to get the $75 before ever doing anything?

It just seems so much simpler to leave out payroll-- I just see so many pitfalls -- they have other choices -- either have the employee pay it directly OR take it out of loan funds. Both of which would cause NO extra processing time and have a lot less pitfalls and a lot less programming/process changing to do.

[GMK]

The employer sends a check to the TPA for $75 and deducts the $75 from the employee's next payroll check(subject to state law, see post #2, above), and ta da it's done. Kinda like when the employer sends the check to the health insurer and deducts the employee's portion of the premium from one or more paychecks. Figure out how you want to handle the cases where there's no payroll check and explain that to the participants in the SPD section on loans.

Even simpler, don't offer loans from a plan that's meant to build a nest egg for retirement, unless of course you're a banker or the plan enlists the services of a banking loan expert.

[Beemer]

I believe the plan sponsor would be alright with the fee paid at the same time as the first loan payment. I suppose if the employee terminated immediately after receiving the loan, then they would not make any loan payments or pay the fee. I could put in the loan agreement that the fee would be paid at the same time as the first payment.

Maybe asking the participant to write a check to the plan sponsor would work better.

[Beemer]

If the participant pays but not from their account, is that direct compensation that would be reported on a Schedule C?