Rolling a loan from one plan to another - New plan doesn't allow loans

[Basically]

A new employee wants to roll his previous employer plan balance over to the plan .  Plan accepts rollovers.  BUT.. he has a loan at the old employer plan and the new plan doesn't allow loans.  Does that mean the loan can not roll in?

If he can't roll the loan in he'll have to pay ot off... or offset the balance and pay taxes as a taxable distribution.  Correct?

[CuseFan]

Correct on all counts. 

[QDROphile]

There is a difference between a plan not allowing loans (origination) and a plan holding a loan as an asset from a rollover. It is unlikely that a plan that does not originate loans will accept a loan as a rollover because the plan will not have the infrastructure to handle payments, but it is a remote possibility.

[Bill Presson]

Our basic plan document gives the Plan Administrator the ability to decide in its discretion whether to accept a rollover of a loan note.  

[Basically]

I've never run into this before (a new employee wanting to roll in a loan).  Overall, 3 good answers!

1.   I am glad I at least had it right if he can not roll his loan in what his options are
2.   QDROphile didn't come right out and say "NO WAY" .  "it is a remote possibility" tells me that it can be done
3.   Bill Presson confirmed the possibility by saying "Our basic plan document gives the Plan Administrator the ability to decide in its discretion whether to accept a rollover of a loan note".  So I will now throw this question to the document company and see what they say.  Make sure that the proper box is checked.

If it turns out they can do this, I will tell them that loan payments must be payroll deducted. 

Thanks!!

[Bri]

Do they WANT to do this as an end-run around the plan's loan provisions?

[QDROphile]

Bri

It is not an end run. Loan origination as a plan feature is philosophically different and serves different purposes than accepting a loan rollover and servicing the loan. 

The difference might not be appreciated by the employees. I know of work places that would riot if the employees learned that a new eployee had a plan loan when they could not get them. The whys and wherefores would not be a consideration.

 

[austin3515]

i am in the middle of the same thing. Company A boiught Company B (asset sale with no merger).  They do not want to have a loan feature but also do not want to "stick it" to their new employees.  So this plan will not offer new loans but will offer the option to roll loans in.  Perfectly normal, and no reason for any concern in my opinion. 

[Peter Gulia]

Some recordkeepers are willing to process a participant’s repayments made by bank transfers.

If that service is available, an employer/sponsor/administrator might (if a plan so provides, or a discretion is exercised) tolerate a rolled-in participant loan without involving payroll.

This is not advice to anyone.

[Basically]

Ya, all great answers and points.  This new employee is taking over as a supervisor in a machine shop. A valuable addition that they do not want to cause any problems for.  They will accept the loan as a rollover and are happy to explain to everyone (who asks) the situation.  I have recommended that they require loan payments be "payroll deducted" to ensure that non are missed and the loan is paid back on time.  

THANKS!

[austin3515]

Honestly that I do not like at all.  If they are an HCE it's a total no go.  You really never want provisions in your plan that pick out your favorite employees.  How do you word the amendment?  "Floor supervisors hired in September 2026 have the special privilege of rolling over loans"?  I would suggest allowing anyone to roll loans over.  That way it is in the SPD, and theoretically everyone knows about it, and no one of course will ever do it.  Maybe remove the provision in a couple of years.  But I wouldn't do it just for this one person. If your eligibility is more than immediate, you should let people know they can do rollovers when hired even if not yet eligible (assuming that is what your document says).  You can;t add this special provision and just not tell people about until its too late to have any value for them.  You could tell tell people 5 times about this option and they probably still won't do it.

By the way, the prior employer will almost definitely not work with you on this. So you might be willing to accept it but they may not be willing to transfer it.  I have literally only ever seen this done in M&A situations because both sides have a vested interest in doing this.

I have a workaround for you:

1) Participant rolls his entire balance into your Plan.

2) They immediately take a loan for the same balance

3) They deposit the proceeds to an IRA and report repayment on their 1040.

 

[QDROphile]

I agree that acceptance of a loan asset by rollover needs to be a fixture in the plan. It could already be there by way of interpretation, depending on plan terms, and as long as no loan rollover has been refused before. Amending the plan or loan policy for the first time when the first user will be an HCE is uncomfortable, but not a clear negative.

I am very confused by the proposed workaround. Among other things, the plan does not offer loans; that is the problem in the first place. How can the new employee take a loan?

[Peter Gulia]

The originating post’s premise is that the might-be-receiving plan does not initiate participant loans. Basically’s query is about whether to accept a rollover-in contribution that includes an outstanding loan made under the distributing plan.

Consider austin3515’s observations. About uniformity. And about what’s practical.

Even if both the distributing and receiving plans’ administrators are willing, either’s recordkeeper might less helpful.

Tax law’s coverage and nondiscrimination rules and ERISA § 408(b)(1)’s call for loans to be “available to all . . . participants . . . on a reasonably equivalent basis” suggest that a plan’s sponsor and administrator might expect a provision that allows a rollover-in contribution to include accepting an outstanding loan allows that opportunity uniformly for all similarly situated participants. 29 C.F.R. § 2550.408b-1 https://www.ecfr.gov/current/title-29/section-2550.408b-1.

Consider that a plan’s acceptance of the repayment rights under a participant loan that had been payable to another plan might be a novation of the loan agreement.

This is not advice to anyone.

[austin3515]

12 minutes ago, QDROphile said:

I am very confused by the proposed workaround. Among other things, the plan does not offer loans; that is the problem in the first place. How can the new employee take a loan?

🤔

Whoopsies