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loans not allowed to per diem employees?


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Can a plan loan policy have a provision that per diem employees are not eligible to take a loan?

I've got a plan where they often move employees to per diem (I don't know the mechanisms or legality behind that, but let's assume it's kosher), so participants who are still considered active will want to access their money.  So they take a loan... and then don't work again for three months, so the loan gets behind and eventually far enough behind to need to be defaulted.

Defaulting a loan is a process, and something that no one wants to deal with.  Plus, there's the question of was it really a valid loan in the first place (the situation that brought this to light is one where the participant was told she was being changed to per diem and then requested a loan immediately) if the Loan Administrator know that it couldn't be paid back through regular payroll deductions. Maybe it was a fiduciary breach by the plan sponsor, maybe it was an intent to get around the distribution rules by the participant.

So that's what led to the question.  My gut reaction is no, but then is it OK for the plan administrator to continually deny loans to per diem employees and therefore create a de facto exclusion?

[If it matters, we are in New York State, where participants have the right to request that their loan stop being paid through payroll deduction, regardless of what the loan policy says.  This is not something that we recommend our clients make known.]

Thanks.

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The policy should be okay if it passes BRF testing. 

The policy likely will not solve the problem of per diem employees being unable to pay via payroll deductions.  Consider that a regular employee takes a loan and begins repayments through payroll deductions.  The employee subsequently becomes a per diem employee.  The loan is outstanding and remains subject to required repayments to avoid default.

If, in the opinion of the plan sponsor, there is a significant number per diem employees that need access to plan loans, then the plan's loan policy could be adjusted to allow for periodic, non-payroll-based repayments.  In practice, the an employee not repaying through payroll deductions should be educated on the conditions and consequences associated with a loan default.

One thing to consider is whether the availability of the non-payroll-based repayments should or could be restricted to per diem employees, and regular employees would remain subject to repayments through payroll deductions.

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Beyond whatever Federal income tax law might call for as a plan’s tax-qualification conditions, for a plan governed by ERISA’s part 4 (fiduciary responsibility) of subtitle B of title I or with transactions that can result in an excise tax or other consequences under Internal Revenue Code § 4975, consider that the rule implementing the statutory prohibited-transaction exemptions requires that participant loans “[a]re available to all such participants and beneficiaries [those who are a party-in-interest or disqualified person regarding a plan] on a reasonably equivalent basis[.]”

29 C.F.R. § 2550.408b-1(a)(1)(i) (emphasis added), https://www.ecfr.gov/current/title-29/part-2550/section-2550.408b-1#p-2550.408b-1(a)(1)(i).

Peter Gulia PC

Fiduciary Guidance Counsel

Philadelphia, Pennsylvania

215-732-1552

Peter@FiduciaryGuidanceCounsel.com

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On 4/12/2024 at 2:08 PM, Peter Gulia said:

“[a]re available to all such participants and beneficiaries [those who are a party-in-interest or disqualified person regarding a plan] on a reasonably equivalent basis[.]”

29 C.F.R. § 2550.408b-1(a)(1)(i) (emphasis added), https://www.ecfr.gov/current/title-29/part-2550/section-2550.408b-1#p-2550.408b-1(a)(1)(i).

Hmmm.  Reading further, that says:
 

Quote

(b) Reasonably equivalent basis.

(1) Loans will not be considered to have been made available to participants and beneficiaries on a reasonably equivalent basis unless:

(i) Such loans are available to all plan participants and beneficiaries without regard to any individual's race, color, religion, sex, age or national origin;

(ii) In making such loans, consideration has been given only to those factors which would be considered in a normal commercial setting by an entity in the business of making similar types of loans. Such factors may include the applicant's creditworthiness and financial need; and

(iii) An evaluation of all relevant facts and circumstances indicates that, in actual practice, loans are not unreasonably withheld from any applicant.

We're not considering any of the items in (i).  Is a participant who is not earning a regular paycheck (from the plan sponsor) a good credit risk? Or isn't it at least a relevant F&C?  But maybe then we're delving into "does the Plan Administrator have to factor in the participant's entire financial situation"... and no one wants that.

Or even going back to this in (a)(3)(i):

Quote

Thus, for example, the mere presence of a loan document appearing to satisfy the requirements of section 408(b)(1) will not be dispositive of whether a participant loan exists where the subsequent administration of the loan indicates that the parties to the loan agreement did not intend the loan to be repaid.

I read this as if the participant or the Plan Administrator suspect that the loan will not be repaid according to the terms, then it's not a valid loan from the jump.  Proving that, of course, is the hard part.

I get that this is mostly me playing Devil's Advocate.  I'm just trying to advise in the most comprehensive matter (and I know that their board is a bunch of lawyers who will parse things down to the micro-level!).

On 4/12/2024 at 1:44 PM, Paul I said:

The policy should be okay if it passes BRF testing. 

The policy likely will not solve the problem of per diem employees being unable to pay via payroll deductions.  Consider that a regular employee takes a loan and begins repayments through payroll deductions.  The employee subsequently becomes a per diem employee.  The loan is outstanding and remains subject to required repayments to avoid default.

If, in the opinion of the plan sponsor, there is a significant number per diem employees that need access to plan loans, then the plan's loan policy could be adjusted to allow for periodic, non-payroll-based repayments.  In practice, the an employee not repaying through payroll deductions should be educated on the conditions and consequences associated with a loan default.

One thing to consider is whether the availability of the non-payroll-based repayments should or could be restricted to per diem employees, and regular employees would remain subject to repayments through payroll deductions.

I don't think we'll pass BRF; there are a lot of per diems. How this issue never came up before, I'll never know.  I totally agree that switching to PD will still be a problem, but I'm at least trying to limit the potential problems. 

That's an interesting idea to limit the non-payroll repayments to PD participants.  Thanks!

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I don’t suggest any conclusion about what is or isn’t a “reasonably equivalent basis”.

I suggest only that a decision-maker consider the point if it seeks either of the statutory prohibited-transaction exemptions.

Peter Gulia PC

Fiduciary Guidance Counsel

Philadelphia, Pennsylvania

215-732-1552

Peter@FiduciaryGuidanceCounsel.com

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For what it's worth, a lot of plans have loan policies that say it is mandatory for repayments to be made by payroll deduction.  I have seen a fair number of plan administrators take this literally and immutably in applying the loan policy.  If an employee for whatever reason - termination, leave of absence, disability, transfer to another company in the controlled group that runs of a different payroll service that won't take payroll deductions (especially NRAs),  ... - then the loans go into default unless the employee can again make loan repayments by payroll deduction.

I, too, cannot say if this approach - mandatory repayments by payroll deduction - satisfies the statutory PTEs, but if it doesn't, there are a lot of plan administrators that don't know it.

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