401k Loans

[Patrick401k]

I am aware all plan sponsors approach loans uniquely. My question relates to a participants reallocation of principal/ interest from the loan. Will a participants biweekly payroll deduction for the loan, automatically be allocated back into the same (TDF) on an amortized level across the 5 year period of the loan? Both principal and Interest?
Clarity to form 5500, plan sponsor Interest Rate withholding of loans? Confusing. Thank you. Patrick 

 

[Bird]

Assuming a self-directed platform, loan payments will generally go into the investment "mix" selected by the participant for contributions. 

[Patrick401k]

I am looking for clarity to the logistics of the process. In a generic example, a participant has all of their savings in one TDF, 20k. Participant takes out a loan for 10k, their amortized re-payment of the loan, will come out of their next paycheck, and go directly into the same TDF? The Principal and Interest will be combined ? Or is the IR siloed?

I do not understand the IR of loans appearing on the form 5500?

[Lou S.]

Again, assuming this is participant directed, if the funds all came out of one TDF, and the participant does not change their investment mix for future deposits, every platform I have ever worked with the repayments would be back to the same TDF. I suppose there are situations where this might be different, but I do not think they would be common norms or industry standards.

The entire payment, both principal and interest, is re-deposited into the participant's account, unless there is some admin fee applied to the payment before deposit or the loan is treated as a pooled investment which is no longer very common.

Typically the loan accounting will take the prior outstanding balance, add interest to it from the last payment and then apply the payment to reduced the outstanding balance. Each loan system might be a little different in how they apply this but it's all going to be pretty close.

[Patrick401k]

Thanks Lou. So, both Principal and Interest re-payments are allocated back into the participants savings, in 24 payments/ annually over 5 years.

Now, the Interest rate loan component, which is displayed on a plans form 5500, is derived from? Is this viewed as a receivable asset of the plan? offset when the participant makes payments, a wash ? Does ERISA regulate or the IRS, just trying to comprehend. Thank you.

 

 

[Lou S.]

I don't follow your question. The interest repaid are earnings to the plan. The interest rate is set by the Plan's loan Program that must be in compliance with IRC  §72(p).

Participant loan interest is reported on Form 5500 Schedule H line 2(B)(e), or gets lumped in the "other Income" line on Schedule I or Form 5500-SF.

If you are talking about the schedule that gets attached with the accountants opinion with the interest rates, that discloses the range of rates of loans issued by the plan which can vary over time since the interest rate is usually variable over time and often tied to the prime rate.

 

[Patrick401k]

This is where I am confused “The interest repaid are earnings to the plan”.  

1) You stated the participant is paying back principal and IR, bi-weekly, which automatically goes back into the same liquidated TDF.

2) The Interest rate on the loan, for sake of argument, (prime + 200bp), amounts to roughly $1800 over 5 years. How can this be both

a plan asset, “earnings to the plan”, and also be going back into the participants TDF? This is where I am lost?  Where does the $1800 end up? As a plan earned asset or participants savings?

 

 

 

[Lou S.]

Yeah, I think you need to review plan accounting and how participant loans works.

[Patrick401k]

Yeah, I am not an accountant for a plan or administrative person for a plan, nor in HR. I was simply attempting to get clarity from an expert relating to a loan, I was under the impression that this is how the Benefitslink forum worked? My bad!

[WCC]

14 hours ago, Patrick401k said:

2) The Interest rate on the loan, for sake of argument, (prime + 200bp), amounts to roughly $1800 over 5 years. How can this be both

a plan asset, “earnings to the plan”, and also be going back into the participants TDF? This is where I am lost?  Where does the $1800 end up? As a plan earned asset or participants savings?

I will attempt to answer this. The participant loan is a plan asset and earns interest which just happens to be paid by the participant. The interest is a plan asset since it is earned on a plan asset. In this case, the loan is part of the participant directed account so the participant is choosing how the funds are "invested" and the participant is earning interest on their loan asset. When payments are made to the plan, the cash buys shares of the TDF. So in your example the $1800 of interest buys shares of the TDF in the participants account. it is similar to any other investment in the plan. If you own a mutual fund that pays dividends, those dividends are reinvested in your account and they buy more shares of the investment. 

[401king]

On 7/22/2024 at 7:21 PM, Patrick401k said:

Yeah, I am not an accountant for a plan or administrative person for a plan, nor in HR. I was simply attempting to get clarity from an expert relating to a loan, I was under the impression that this is how the Benefitslink forum worked? My bad!

What is your role? Knowing your limits will help those here answer your questions. The truth is that it's straightforward enough that it seems unclear what parts you are missing.