Stop my loan payments

[52626]

Good Afternoon  All -

Participant took a loan 2 years ago ( 5 year note) and has been making payments as required via payroll deduction.

Participant has told the employer she can not afford the payments and to stop the withholding - she will default on the loan.

1. The loan program requires payments be made via payroll deduction until the loan is paid in full

Can a participant  just stop their deferrals?  Seems to me,  if the employer allows this employee to stop, they have opened the "black hole" for others to do the same. Some how the IRS would have to view these as  sham loans - done as a way to get funds not otherwise available.

Doesn't stopping the loan payment cause the loan to violate 72(p)?

I have read some states mandate if the employee tells the employer to stop a withholding, the employer must stop. Even though this is contrary to ERISA.

Thank You for  Friday afternoon help!!

[CuseFan]

I had a large client years ago where this happened occasionally. I think you have to stop the payroll withholding and let the loan default. Remember, there is no statutory requirement that loan payments be made via payroll withholding, that just happens to be this plan's (and many plans') program. Some plans - like those using the MyPlanLoan product - have moved loan administration out of the employer's/payroll's hands into a third party direct billing system managed by the TPA/RK. If the employee takes a loan and then fails to make the payments, the loan defaults and gets reported.

[QDROphile]

Beware of informed arrangements that use payroll deductions as part of the arrangement to secure loan payment. They are not part of off-the-shelf loan documentation and third-party administration so the risk of stumbling over them is small — but they resolve questions about employee participants electing to stop payments and they protect  the fiduciaries.

[Larry Starr]

1 hour ago, 52626 said:

Good Afternoon  All -

Participant took a loan 2 years ago ( 5 year note) and has been making payments as required via payroll deduction.

Participant has told the employer she can not afford the payments and to stop the withholding - she will default on the loan.

1. The loan program requires payments be made via payroll deduction until the loan is paid in full

Can a participant  just stop their deferrals?  Seems to me,  if the employer allows this employee to stop, they have opened the "black hole" for others to do the same. Some how the IRS would have to view these as  sham loans - done as a way to get funds not otherwise available.

Doesn't stopping the loan payment cause the loan to violate 72(p)?

I have read some states mandate if the employee tells the employer to stop a withholding, the employer must stop. Even though this is contrary to ERISA.

Thank You for  Friday afternoon help!!

We have few plans that allow loans; this is just one of the many reasons. I always set up loans for payroll deduction repayment, but also tell the client that such a provision is NOT enforceable.  An employee can, at any time, tell the employer NOT to take the payments out of his check but that he will remit the payments directly (which is perfectly allowable).  It is against the law in (almost?) every state to take money out of an employee's paycheck without their permission (it is an "impermissible garnishment").  If the employee then defaults by not making payment, the plan has to follow the rules about "foreclosing" on the loan (it becomes a distribution).

[Peter Gulia]

If the participant’s loan agreement mandates payroll deductions:

 

While I’ve never rendered advice on this issue (and don’t now), I’ve heard the analysis go something like this:

 

Obey the participant’s loan agreement,

 

without exception if the State wage-payment law that governs the employer’s payment of the participant/employee’s wages allows an irrevocable authorization or does not make taking a payroll deduction without the employee’s authorization a crime.

 

but allow a deviation if the governing wage-payment does not allow an irrevocable authorization and taking a payroll deduction without the employee’s continued authorization is a crime.

 

ERISA § 514(b)(4):  “[ERISA § 514(a)’s preemption] shall not apply to any generally applicable criminal law of a State.”  https://www.govinfo.gov/content/pkg/USCODE-2017-title29/html/USCODE-2017-title29-chap18-subchapI-subtitleB-part5-sec1144.htm