Can loans be stopped while there exists a loan?

[TPApril]

Employer hates loans and wants to stop offering them.  Does he need to wait until all outstanding loans have been paid off, or are those loans fine retaining the loan policy in place at the time of the promissory note?

[Bird]

7 hours ago, TPApril said:

Does he need to wait until all outstanding loans have been paid off

no

[Bill Presson]

We've often stopped new loans while grandfathering in the existing loans. No issues.

[QDROphile]

One can imagine some restrictions.  For example, a loan program cannot be opened for use by HCEs (more likely, the owner), and then terminated.  Generally not prohibited.

[CuseFan]

1 hour ago, QDROphile said:

For example, a loan program cannot be opened for use by HCEs (more likely, the owner), and then terminated

That is a great point. Assuming the currently outstanding loans are not with HCEs, amending the plan to cease new loans effective 1/1/2022 (for example) is perfectly acceptable.

[TPApril]

Yes, I hate to say it, but the one outstanding loan happens to be a 50% owner, albeit not the one who serves as Trustee and is asking for this change.  The only other prior loan was an NHCE.

I immediately responded that I strongly recommend against it and owner said he just wants to get rid of the option.  Reason being he hates the administration dealing with payroll and the recordkeeper.

[QDROphile]

The optics are not terrible.

[QDROphile]

Interesting question about whether it is an employer or fiduciary function (in the abstract) to determine whether or not to adopt or terminate a loan program. The plan document is relevant.

[kpension]

21 hours ago, TPApril said:

Yes, I hate to say it, but the one outstanding loan happens to be a 50% owner, albeit not the one who serves as Trustee and is asking for this change.  The only other prior loan was an NHCE.

I immediately responded that I strongly recommend against it and owner said he just wants to get rid of the option.  Reason being he hates the administration dealing with payroll and the recordkeeper.

Maybe the owner that has the loan will pay it off to ensure nondiscrimination in the elimination of loans. 

[thepensionmaven]

I don't see a problem, in fact I have a few plans that have deleted the loan provision going forward but grandfathered the ones in existence.

I don't believe loans are a BRF provision that can't be cut back.

Matter of fact, I advise my new clients not to have a loan provision in the plan.  As well as being an "administrative burden", participants do not follow the amortization schedule, have late payments, some have stopped repaying all together.

Then they complain about receiving a 1099.

[Belgarath]

I think a bit of common sense needs to be used, but other than an egregious situation, I see no problem with it. Yes, for example, if you amend the plan to allow loans, one or more HCE's take a loan, then you amend it back out a week later, that's likely a problem. But in general, assuming the loans are available on a reasonably equivalent basis, and both current and effective availability are satisfied, the fact that no NHCE's choose to take a loan does not prevent the plan from amending the loan provision out of the plan. I've seen very few plans that were structured such that removing a loan provision presents a problem.

[Joe L]

The employer needs a record keeper who handles loans directly with the employee and removes payroll repayments all together.

[Bird]

16 hours ago, Joe L said:

The employer needs a record keeper who handles loans directly with the employee and removes payroll repayments all together.

A. Name one or two that will do that.  All RKs I know refuse to deal with participants except in rare cases.

B. If you don't make payments thru payroll they're generally not going to be made at all.