Asset Sale-Sellers Plan Terminating with Participant Loans

[ERISAGal]

When an asset sale occurs between two entities both having 401k plans and the seller's plan terminates, what happens to the outstanding loans in the seller's plan?  Since it is being terminated rather than merged, is there any way to "transfer" the outstanding loans to the Buyer's plan in order to avoid the loans being defaulted and taxed to the participant?

Thanks for your help with this...I can't seem to find a definitive answer...Yes, I know it will depend on the plan documents of both plans, but wondering if the plan's could be amended to allow for the transfers of the outstanding loans.  

Thanks again!

 

[Bri]

Sure - many plans allow loan balances to be rolled over, even if they become due and payable upon termination of employment upon a separation from service with the plan sponsor.

(And yeah - definitely make sure the buyer and its plan are cool with accepting such a rollover and can arrange for a new payroll deduction agreement, etc.)

[EBECatty]

As Bri mentions, it's pretty common to allow loan rollovers in this situation. It's simple in theory, but the logistics can be challenging (for example, rolling over the loans before the cure period expires, especially if the recordkeeper requires 45-60 days to terminate the plan and will not allow individual distributions before then; catching up any missed payments during the transition; re-amortizing if the seller's and buyer's payroll periods differ (every two weeks vs. twice a month); setting up loan repayment deductions with the buyer; etc.). 

[ERISAGal]

Thank you both!  Can the loans be rolled over from the terminating plan before the plan is fully funded for all employer contributions through the effective date of termination?  Would the decision be required at the participant level or can the plan sponsor make to decision to roll over all loans?

Thanks again!!

[EBECatty]

3 minutes ago, ERISAGal said:

Can the loans be rolled over from the terminating plan before the plan is fully funded for all employer contributions through the effective date of termination?

Yes, although the current balance would have to be rolled over with the loan, so this would require two separate distributions/rollovers if the same participant is getting another contribution. Check with the recordkeeper as well.

4 minutes ago, ERISAGal said:

Would the decision be required at the participant level or can the plan sponsor make to decision to roll over all loans?

Each participant would need to elect a rollover (including their account balance with the loan) individually. 

[BenefitJack]

Assuming:

• The seller is terminating their 401k plan.
• The 401k plan will authorize participants to take a distribution.
• The buyer will be hiring some, but probably not all of the individuals who have an account balance, and/or a loan outstanding.

I would encourage the plan sponsor to amend their plan so as to permit "effective transfer" of outstanding plan loans. To be truly effective, this would require the plan to be amended as necessary so that:

• The plan accepts rollovers from all plans and IRAs (except Roth IRAs),
• The plan offers multiple loans (regardless of number) up to the code dollar limits, and
• The plan incorporates electronic banking so that not only can plan loan repayments continue post separation, but so that plan loans can be initiated post separation.

I would not limit the plan provisions solely to this single transaction, but facilitate such "transfers" for any new hire or current worker who becomes a participant in the plan, or for any current or former worker who is a participant in the plan.  

See: https://401kspecialistmag.com/how-to-stop-401k-leakage-from-plan-loans/

Essentially, you roll over the remaining account balance, then borrow from the new plan, as necessary, where each loan from the new employer's plan is used to complete the rollover process.  

 

Happy to discuss further, on why this is a superior solution in terms of avoiding leakage and maximizing participant perceived and actual value, and engagement. 

[Luke Bailey]

On 5/17/2022 at 11:29 AM, EBECatty said:

Yes, although the current balance would have to be rolled over with the loan,

EBECatty, are you aware of a rule that would prohibit the direct transfer of only the loan?

[EBECatty]

No, not specifically, but every recordkeeper I've dealt with will only allow loan rollovers if the remaining account balance is directly rolled over with it. There may well be a nuance requiring this that I'm not aware of, but I've always taken it as a given, if for no other reason than it's a practical requirement (even if not a legal one).

[Luke Bailey]

10 hours ago, EBECatty said:

No, not specifically, but every recordkeeper I've dealt with will only allow loan rollovers if the remaining account balance is directly rolled over with it. There may well be a nuance requiring this that I'm not aware of, but I've always taken it as a given, if for no other reason than it's a practical requirement (even if not a legal one).

Right. The PLRs that first acknowledged the ability to do loan rollovers back in the 1990's and put them on the map,  if I recall correctly, stated in their facts that the entire accounts were being rolled over, including the loans. But I think it's probably not really a requirement under the law.