Prevailing Wage Plan

[oldman63]

A prevailing wage plan has loan repayments going back into the plan with pre-tax money from the payroll.  In addition, the loan repayments are being paid by the "untaxed/pre-taxed" fringe benefit dollars.

My understanding is that loan repayments are paid with after-tax dollars.  A participant is repaying part of the loan with money that has already been taxed. As you know, one of the benefits of contributing to a 403(b) or 401(k) is the fact that the money is invested pre-tax. When a participant takes out a loan,  he/she isn’t taxed on the proceeds, but the money used to repay the loan has already been taxed so the additional interest going into the account will effectively be taxed twice–at the time of contribution and again when eventually withdrawn from the account in retirement.

The rules would not change just because this is a prevailing wage plan?

[justanotheradmin]

Correct, the rules do not change. 

If the participant took a private loan from a bank, the loan payments back to the bank would be post tax, the fact that the loan is from the plan does not change how loan payments are treated under the internal revenue code.  

 

[Bri]

So the amounts being used to repay the loans aren't being included in their taxable income each week?  (Either fringe or not)

[Mike Preston]

1 hour ago, Bri said:

So the amounts being used to repay the loans aren't being included in their taxable income each week?  (Either fringe or not)

Well, they should be, but oldman says they aren't.

[Larry Starr]

6 hours ago, oldman63 said:

A prevailing wage plan has loan repayments going back into the plan with pre-tax money from the payroll.  In addition, the loan repayments are being paid by the "untaxed/pre-taxed" fringe benefit dollars.

My understanding is that loan repayments are paid with after-tax dollars.  A participant is repaying part of the loan with money that has already been taxed. As you know, one of the benefits of contributing to a 403(b) or 401(k) is the fact that the money is invested pre-tax. When a participant takes out a loan,  he/she isn’t taxed on the proceeds, but the money used to repay the loan has already been taxed so the additional interest going into the account will effectively be taxed twice–at the time of contribution and again when eventually withdrawn from the account in retirement.

The rules would not change just because this is a prevailing wage plan?

Who is administering a plan where loan repayments are going back into the plan with pre-tax money?  In fact, those are NOT loan payments if they are deferrals.  Which means you have a situation where no payments are being made and you have a potential disqualification on your hands.  I'm sorry to say, but no knowledgeable admin firm would ever do this; you have to question the competence of whoever is administering the plan.  I doubt the loan documentation provides for this situation, if proper loan documentation was done.

This is such a fundamental error that we need to know much more about how this plan is operating to try to advise.  Looks like BIG problems.

And, yes, prevailing wage provisions have absolutely nothing to do with this issue..  If loan repayments are being made from untaxed/pre-taxed fringe benefit dollars, then the participant is not making any loan repayment at all since those dollars are coming from the employer.  MANY MANY PROBLEMS with the partial description given.