Loan repayment with ACH

[ejohnke]

We have a client that was using a Custodian that allowed for participant loans to be repaid using ACH. The Plan permits a terminated participant, making payments via participant ACH, who has elected to defer receipt of a final distribution, to continue making scheduled installment payments on the participant's outstanding loan. 

When the Plan document was restated as a Post PPA document, the ACH/terminated participant repayment loan provisions were not maintained. Since 1/1/22, the Plan has not been operating in accordance with their written loan policy. (They continued to allow for ACH/terminated participant repayment because it was never their intent to remove this provision. The Post PPA loan policy change was a Scrivener's error.)

We are thinking about doing a retroactive amendment to return the ACH/terminated participant repayment loan provisions to the Post PPA document. Is this an appropriate correction? It almost seems too straightforward. Am I missing something?

[Bird]

That's what I would do. I think others might disagree but it's pretty harmless. 

[Paul I]

I suggest there is an argument saying the ability for a terminated employee to repay the loan by ACH was a protected benefit at least for anyone who was doing so at the time of the restatement, and the continuation of the ACH repayments was appropriate.  If this situation is treated as a protected benefit, then there is no reason for a retroactive amendment.  If the company wishes to add back that provision prospectively, they should do so.

Calling anything is a Scrivener's Error will get a knee-jerk response from the IRS that there is no such thing.  Attached is a fun read about this.

 

49_Scriveners Error_ Qual Plan Corrections.pdf

[Ilene Ferenczy]

If the loan repayment policy is part of the plan, I believe you can correct retroactively, because it increases, rather than decreases, participant rights.  If it is just a procedure, I would do a resolution of whoever is the governing body (i.e., Committee or company, whatever is applicable) to identify that the change was inadvertent and is being put right.

 

The only exception i would have to all of this is if the only affected participant is an HCE - it could look discriminatory.  But, I am not sure if that would even concern me in this situation, barring other facts that are problematic (such as, 3 NHCEs asked to repay by ACH and were denied during the relevant period).

[Bantais]

On 2/9/2024 at 6:06 PM, ejohnke said:

We have a client that was using a Custodian that allowed for participant loans to be repaid using ACH. The Plan permits a terminated participant, making payments via participant ACH, who has elected to defer receipt of a final distribution, to continue making scheduled installment payments on the participant's outstanding loan. 

When the Plan document was restated as a Post PPA document, the ACH/terminated participant repayment loan provisions were not maintained. Since 1/1/22, the Plan has not been operating in accordance with their written loan policy. (They continued to allow for ACH/terminated participant repayment because it was never their intent to remove this provision. The Post PPA loan policy change was a Scrivener's error.)

We are thinking about doing a retroactive amendment to return the ACH/terminated participant repayment loan provisions to the Post PPA document. Is this an appropriate correction? It almost seems too straightforward. Am I missing something?


Also, has anyone had experience documenting similar retroactive fixes? We’ve been reviewing comparable cases and tools— carteza.com, for example, offers some insightful compliance resources for plan sponsors, especially when navigating complex post-amendment reconciliations.

It sounds like you're on the right track. If the omission of the ACH/terminated participant repayment provision was indeed a scrivener’s error and the plan has continued to operate under the original intent, then a retroactive amendment is a reasonable and common correction method.

The IRS generally allows for retroactive amendments to fix such inconsistencies, especially when there's a clear record that the plan was administered in good faith according to its prior terms. Just be sure to document the original intent, the error, and the consistent operation since 1/1/22. You may also want to consult ERISA counsel to confirm the approach and ensure no additional compliance issues are triggered.

It does seem straightforward in this case, but validating with your legal team is always a smart step.