Loan for someone on Leave

[Lou S.]

Plan allows for loans. Loan program allows for payments to be suspended while on medical leave.

Plan does not allow for hardship.

Participant is not old enough for in-service.

Participant goes out on approved medical leave. 

Participant now wants to take a loan to cover his medical bills, sponsor wants to allow.

Participant and Sponsor then want to immediately suspend loan payments (that is no loan payments will be made initially) until participant returns from medial leave, not to exceed 1 year. Loan would accrue interest and be re-amortized so as not to exceed 5 year period when participant returns.

Is this allowable from a code standpoint?

[Belgarath]

Interesting question. I'd say yes - there's an enforceable agreement to repay the loan, which is properly suspended as permitted under 1.72(p)-1, Q&A-9 - and it will be reamortized to remain withing the 5-year period. Although I haven't heard of anyone doing this, it seems valid to me. 

[Lou S.]

Yeah it's an unusual fact pattern for sure. My only question is does this meet the definition of eligible loan based o DOL rules at the time of issue knowing the payments will be suspended before they begin?

My initial reaction is the same as yous Belgarath, that it is allowable but it is something I have never run across before.

[Peter Gulia]

That a leave might delay repayments does not excuse the borrower from her obligation.

[Treasury] 26 C.F.R. § 1.72(p)-1/Q&A-9 https://www.ecfr.gov/current/title-26/section-1.72(p)-1.

Does the plan secure a participant loan with the participant’s account balance?

[Labor] 29 C.F.R. § 2550.408b-1 https://www.ecfr.gov/current/title-29/section-2550.408b-1.

[Belgarath]

14 hours ago, Peter Gulia said:

That a leave might delay repayments does not excuse the borrower from her obligation.

I agree. But depending upon how one interprets things, I don't see this situation as excusing the borrower from her obligation? I'm assuming the loan is secured by the account balance. There's a legally enforceable obligation to repay, and the level amortization requirement is overridden under Q&A-9. Peter, have you ever seen this come up, one way or the other? With what result/interpretation?

Your objectivity in analysis of statutes/regulations/etc. is always unparalleled, but to put you on the spot here, (if you are willing), if you were a Plan Administrator, would you allow such a loan? If you'd rather not answer that, I fully understand! This is a matter of personal curiosity only, as I've never seen this, nor do I expect to ever see such a request.

Thanks!! 

[Paul I]

Read the plan document and the loan promissory note very carefully. 

There can be a difference between being eligible to take out a new loan while on medical leave versus being able to suspend repayments of an existing loan due to going out on medical leave.  This difference may be buried in provisions that say there has to be a reasonable expectation at the time the new loan is taken that the loan will be repaid through payroll deductions.

How medical leave plan works also may factor into the decision.  Is the participant while on leave receiving pay from the company, a short term leave plan or a long term leave plan, and is any of this considered plan compensation? It may be unlikely but it may be possible for the source of these payments be a factor to consider.  Some plan provisions may require a participant to be unable to make the loan repayments in order to qualify for the suspension.

There also is the issue whether, by permitting this loan, the plan sponsor is creating a precedent that other participants who are on other types of leave could use to take out new loans.

It also would be helpful to clarify the role of the participant versus role of the plan sponsor in invoking the suspension.  It would seem the plan would say whether the participant medical lease has the right to suspend repayments, and the plan sponsor just needs to administer the plan's loan provisions.

[Belgarath]

All excellent points.

[Peter Gulia]

I have not seen a situation like the one Lou S. describes. But that’s because plans I work with use a recordkeeper’s nondiscretionary computer-based procedure to approve or deny a claim for a participant loan. A participant’s request either is in good order with the rules the plan’s administrator instructed the recordkeeper to apply, or is NIGO and denied. There would be no human discretion, and the computer would lack information about a future leave.

(The loan-application form has the claimant state every fact and every promise needed to follow the plan’s loan provision and procedure, and state everything under penalties of perjury.)

If I were the human deciding for a plan’s administrator (and assuming I had caused the plan’s sponsor to revise the plan’s governing documents and written procedures to my satisfaction before I hypothetically consented to serve), I would not deny an otherwise sufficient claim for a participant loan merely because the participant will soon be on an approved leave if the administrator lacks knowledge that (i) the participant does not intend to repay the loan, or (ii) the participant won’t return to work soon enough, or her pay won’t be enough, to reamortize and repay the loan as the I.R.C. § 72(p) rule calls for.

I recognize that claims procedures I’m used to can take on extra difficulties when a plan’s administrator (often impractical to separate from the employer) has too much information about the participant.

This is not advice to anyone.

[Lou S.]

Thank you for all the comments. They are very helpful. 

I'm going to get some clarification but my understanding is the participant is on medical leave due to surgery and needs funds for medical expenses and is expected back in  at work in 60 to 90 days. But it is a construction job and who knows if he will really be cleared by then or not.

The plan does not allow hardships or that would be the likely route.

[Artie M]

Given what has been stated, the plan does not explicitly prohibit a loan to a participant on or going on leave.  Since it is silent, it seems the plan could permit a loan to this participant.  There is no prohibition in the Code for a loan being given to a participant on or going on leave.    To me this would fall under the plan administrator's right to interpret the terms of the plan.  As long at the loan provisions (e.g., suspension of payments, reamortization, and deemed distribution, if necessary) are administered properly, I don't see a qualification failure if the loan is provided.  Once concern though is that your post states that the Plan Sponsor wants to work with this participant and permit the loan.  Presumably this type of situation has never come up before (if it has, it should be treated like it was in the past).  However, if the loan is approved and this situation comes up again, the loan should be made to the next participant who requests a loan when they are going on or are on leave (regardless of the Plan Sponsor's desires) as loans must be available to all participants and beneficiaries on a reasonably equivalent basis and the loans must be administered according to a uniform loan program.   

[Lou S.]

Thanks Artie. No, the situation has not come up in the past. The Plan Administrator agrees that whatever they do decide on in this particular case will be documented and used as a model should the situation arise in the future. FWIW the participant is not a highly compensated employee.

For now, they are seeing if the vendor can handle this situation and will adjust its administrative policies accordingly to reflect the decision.