Ineligible participant received loan

[Erin L]

A participant who terminated in 2017 applied for and was approved for a loan in March 2022.  The participant is making repayments on a quarterly basis outside of payroll.  The plan document states that loans are allowed to only active participants and repayments must be made through payroll deductions.  It turns out that the participant's termination date was not entered into the platform which was what enabled it to be initiated.  The Plan Sponsor discovered this during 2023 and wants to know how this gets corrected.  Thoughts?

[Paul I]

It is an operational issue, and you may want to gather some more information to understand more fully how this occurred.  For example, how are termination dates reported to the platform (manually by the company, periodic payroll file, other?)  If loans must be made through payroll deductions, should quarterly repayments been approved?  How is the platform supposed to notify the company and payroll to start repayments?  How did the participant know how and where to send in the repayments?  Is the participant a former HCE?

Keep in mind that corrections to operational issues involve showing the cause of the issue has been addressed.  The answers to these questions will help in deciding how to correct the issue, and how to prevent the issue from occurring again.

[fmsinc]

Thoughts about what?  Whether or not to fire the Plan Administrator? How to collect the loan balance due?  

[Roycal]

How to collect the loan balance?  Take a look at the promissory note that the participant signed (by whatever means).  Does it provide some sort of a right by the lender it could use call the loan in?  It seems to me that there should be, maybe not precisely worded as such, i.e. for loans made to noneligible individuals, but in general terms.  One would have to read the note carefully to see if this would work. Do that.  Maybe just an offset-distribution of the account is called for.  Notes typically include (or should) lots of boilerplate to give the lender all kinds of rights and options when things go amiss.  As Paul I points out, looking ahead, you need to answer the questions: (1) who screwed up; (2) how did the screw up occur; (3) to what extent was it just a human failure or a failure at the system level (that is, poor system).  If this becomes a big deal, who might be liable for the screw up?  Obviously, making a loan is making an investment of plan assets, which brings the normal fiduciary prudence rules into play.

[Erin L]

Thanks!  Today we looked a little further and it turns out the ineligible loan was made to the executive director's wife.  Going further it appears that the executive director himself took out a primary residence loan in 2021 and then his wife's ineligible loan was also a primary residence loan in 2022.

[Paul I]

This is the type of situation where I like to mention the word "jail" in the conversation. 😁

[RatherBeGolfing]

1 hour ago, Erin L said:

the executive director himself took out a primary residence loan in 2021 and then his wife's ineligible loan was also a primary residence loan in 2022.

If we ignore the ineligible part, both of them taking primary residence loans doesn't make it wrong or illegal.  It just had to be a valid reason at the time (in 2021 and 2022)

[Centerstage]

Likely won't help, but I think former employees who are still "parties in interest" can't be excluded from eligibility for loans https://www.dol.gov/sites/dolgov/files/EBSA/about-ebsa/our-activities/resource-center/advisory-opinions/1989-30a.pdf Doubtful former exec director and spouse were "parties in interest" in 2021 and 2022 when loans were made, but you might want to look at the categories in ERISA Section 3(14) -- maybe in addition to taking plan loans, they were also providing services to the plan?