Limitations On PTE 80-26 Loans - Do They Exist?

[mming]

I know quite a few years ago the rules were changed by getting rid of the 3-day rule regarding the length of some 80-26 loans, but I have not been able to find any guidance regarding how long such a loan can remain unpaid.  Also, seemingly absent is anything addressing the amount of the loan in relation to the amount of ongoing expenses.  For example, a large profit sharing plan is constantly making distributions to terminating participants.  The plan's assets are held in two accounts, one with TD Ameritrade for all of the equity investments, and a bank account specifically for payouts.  The trustees are reluctant to liquidate securities to make the payouts and would prefer to make 80-26 loans to the bank account. The trustees, who try to pay terminees asap, try to invest as many assets as possible in stocks, thereby sometimes leaving the plan cash poor.  Would it be acceptable for the employer to loan the plan $40K so that terminees over the next few months can be paid out when the actual amount of cash needed is currently unknown (which could result in the cash just sitting there for months)?  How long can the loan remain outstanding? 

I'm guessing there may not be any restrictions regarding how soon an expense must be paid after the plan receives the loan.  In the absence of any guidelines, I would be curious to hear how such loans are typically handled, especially since loans lasting over 60 days must be in writing and I'm not sure how to word the promissory note.  All help is greatly appreciated. 

[Peter Gulia]

This hyperlink is to the Labor department’s posting of the exemption, amendments of it, and a clarification.

 

https://www.dol.gov/agencies/ebsa/employers-and-advisers/guidance/exemptions/class

 

Among the constraints on the amount of the loan is that the persons that seek to rely on the exemption bear the burden of proving that the loan’s proceeds are used only to pay the plan’s ordinary operating expenses.  That condition might suggest that the loan must be limited in amount and duration based on a prudent estimate of the anticipated expenses.

 

And even if the lender is willing to make an interest-free loan for a long period, the plan’s fiduciaries must act prudently to avoid disadvantageous terms, including the possibility of an obligation to repay in an inopportune amount or at an inopportune time.

[mming]

Thanks, Peter.  I had a feeling there wouldn't be too many specifics, and if justification ever became an issue, facts and circumstances would weigh heavily.  As with other gray or undefined areas, it seems the best way to proceed is with good-faith interpretation of the limited guidance and the prudent man rule.  In other words, don't overdo it and use a little common sense. 

[Larry Starr]

21 hours ago, mming said:

I know quite a few years ago the rules were changed by getting rid of the 3-day rule regarding the length of some 80-26 loans, but I have not been able to find any guidance regarding how long such a loan can remain unpaid.  Also, seemingly absent is anything addressing the amount of the loan in relation to the amount of ongoing expenses.  For example, a large profit sharing plan is constantly making distributions to terminating participants.  The plan's assets are held in two accounts, one with TD Ameritrade for all of the equity investments, and a bank account specifically for payouts.  The trustees are reluctant to liquidate securities to make the payouts and would prefer to make 80-26 loans to the bank account. The trustees, who try to pay terminees asap, try to invest as many assets as possible in stocks, thereby sometimes leaving the plan cash poor.  Would it be acceptable for the employer to loan the plan $40K so that terminees over the next few months can be paid out when the actual amount of cash needed is currently unknown (which could result in the cash just sitting there for months)?  How long can the loan remain outstanding? 

I'm guessing there may not be any restrictions regarding how soon an expense must be paid after the plan receives the loan.  In the absence of any guidelines, I would be curious to hear how such loans are typically handled, especially since loans lasting over 60 days must be in writing and I'm not sure how to word the promissory note.  All help is greatly appreciated. 

I would suggest that a loan made before there is a need for it would not (may not?) meet the requirements of the PTE and I would not suggest it be done. If they have actual need for cash, then I think the loan could be made at that point.  I'm not sure the desire NOT to cash out securities is a valid excuse for long term loan under this PTE.  The few days that it might take to secure the sale and receive the cash to deposit in the bank account is what I would consider a reasonable period.  The trustees should NOT be holding a "note receivable" to the employer when they have the clear capability of NOT having a loan payable.  How do we argue that it is in the best interests of the participants to have such a loan?  I would prefer that the employer make some of its plan contributions to the bank account, which can hold cash for the purpose of making payments to participants, but only in an amount that is reasonable (that would be a fiduciary issue).  If the money is just sitting there, I don't know that we can say it is being used  "for the payment of ordinary operating expenses of the plan, including the payment of benefits in accordance with the terms of the plan and periodic premiums under an insurance or annuity contract...".  FWIW.