Loan Repayments for Spin-off Plan

[RayRay]

Hi all! We're looking at taking over a plan that is a spinoff from a MEP. The MEP allowed for Loans, but the employer does not intend to include loan provisions in the new plan. Would this be able to be treated like a plan termination offset situation for the few participants who have loans, allowing them to begin rolling funds into an IRA to replace the loan offset? Or is there some anti-cutback rule that I am not thinking of that would require the employer to allow the participants with loans to continue their payroll deductions for loan repayments into their accounts in the plan until all are repaid? 

Thanks!

[QDROphile]

A spun-off plan has all the provisions of the original plan.  To eliminate the loan provisions would require an amendment.  Even then, the outstanding loans remain an asset of the spun-off plan and the participants have a contractual right to continuance of the terms applicable to the outstanding loans.  If you are baffled by the result, picture a plan that does not allow loans but allows rollover of loans into the plan.  Do not take this analogy that includes the term "rollover"* to somehow lever the mistaken idea that you can apply any concept of "termination" to a spin off transaction.  The whole point of a spin off is that the spun-off plan continues without missing a beat, subject to amendments.  Ask yourself, with respect to a regular plan (no spin off or MEP confusion), "Can I amend out the loan provision, and what would I do, pot amendment, with the outstanding loans?"

 

*Because rollover is relevant when considering plan termination or employment termination.

[Lou S.]

I agree with QDROphile and to add, I you can eliminate the new Loan Feature in the spun off plan by plan amendment as the offering of loans is not a protected benefit, but you have to administer the loans that come over in the spin off as they are already plan assets subject to the terms of the loan note.

[RayRay]

That all makes great sense, thank you both!

[Luke Bailey]

QDROphile and Lou S., out of curiosity, in the very unlikely case that the loans had in them (i.e., the loan contract, whether on paper or in bits) a provision that provided the employer could accelerate them in connection with a business transaction, or if the employer just got tired of having to administer loans, do you think it could do that? It would seem that the loan terms are not a 411(d)(6) protected benefit. I'm just talking theoretically. Obviously, this would make not be smart benefits policy in almost any situation I can think of.

[QDROphile]

No to the “just got tired part” because the participant has contractual rights once the loan is made.  The ability to initiate a loan is not a protected benefit.  That does not cover breaching the terms of an existing loan.

As for calling a loan in accordance with its terms, that addresses the contract issue, but such a term is (a) pretty farfetched, especially in these days of off-the-shelf documents, and (b) partly because it is so farfetched, I would inquire (which I am not going to do) whether or not such term meets the applicable loan standards. Last time I paid attention, plan loans had to be commercially reasonable (shorthand).

If the plan is terminating and liquidating, the contractual right does not prevent or change the tax consequences of distribution.

[Luke Bailey]

QDROphile, your commercially reasonable point is a good one, but there is such a thing as a demand loan. Maybe since the lender is the plan, a decision to call is a fiduciary decision. Probably is.

[QDROphile]

In a 401(k) context, what rational borrower would take a demand loan?  Which raises the question about whether or not such a design is reasonable, and I would not want to be the designer in a test case.  And what fiduciary, charged with acting in the best interests of a participant, would call a demand loan if the participant did not desire it?  A prepayment provision gives the participant all the benefit needed if the participant actually wishes to pay in full.  I think you are just having some sport.  You said said something yourself about smart benefits policy.

[Luke Bailey]

QDROphile, I'm just trying to figure out the legal boundaries. I think the restraint on the lender side of the loan is probably that they are an ERISA fiduciary.

[Lou S.]

I don't know Luke you bring up an interesting point. You can accelerate payments for termination of employment or termination of the Plan. I'm not sure what other reasons the IRS would accept for legally accelerating the payment of the note and making it due and payable immediately essentially. If you did have such a provision, I would assume it would have to be part of the promissory note, included in the Loan Program and not be subject to arbitrary discretion of the Plan Administrator. It's not something I can say I've thought about before.

[Luke Bailey]

Lou S. and QDROphile, maybe what we're getting at is that theoretically employers could put some bad provisions in their loans and the participant's remedy under the law for dealing with that may not be completely clear. Hopefully no employer would want to do that, but the OP implied that the acquirer of target wanted to terminate the loans of the target employees, most likely in violation of the loans' provisions, and it started me down the path of "what if." In the case of the OP, if in fact accelerating the loans was in violation of their provisions, that should take care of it, of course.