What happens to loan notes when a plan loan program terminates and all

[Guest EMC]

1. Can a plan terminate its loan program and call in all outstanding loans, deeming distributions to the borrowers who do not choose to pay the entire outstanding balance?

2. If so, are there any time restrictions?

3. Finally, if the plan terminates its loan program and deems distributions to those participants who do not pay, what becomes of the plan asset that is the loan note? There is no longer any loan program through which a participant could pay it back (even if he/she wanted to) but a "deemed" distribution is clearly not an "actual" distribution per the IRS regs. This leads me to think that the note has to hang around as a "plan asset" even though it can never be paid back. Any advice?

[Alan Simpson]

Do ALL the notes allow for the note to be called? Otherwise you probably won't be able to call the note and you will have to continue with the loan program for the existing loans. You could however stop allowing new loans since they are not a protected benefit.

[Guest EMC]

Alan, thanks for the quick reply. You make a good point, but I'm curious as to your authority for the proposition that the notes must allow for being called. The sponsor implicitly retains the right to terminate the loan program (as it is not a protected benefit), and so what authority prevents the sponsor from calling in the notes at that time? It seems similar to the situation faced when a sponsor decides to terminate a plan. There, the loans would surely be called whether the notes provided for being called or not. The point being that there *are* situations in which loans may be called without providing for such calling in the note itself. In this regard, I'm mainly interested in what authority would prevent a sponsor from calling in the notes on termination of the loan program, and if nothing, how my 3rd question pans out. Thanks!

[rcline46]

Read the loan contract itself. I have not seen one where it can be 'called'. Some have provisions for termination of employment or lack meeting payment schedule, but not by sole action of PA.

Plan termination means one of parties is gone, and the note is not 'called', it is distributed along with other assets.