Commisioned employee with not enough pay to coever loan payments.

[Guest Una M]

I have a participant who is a commissioned employee. Sometimes, he earns little or nothing and his paycheck will not cover a loan payment as medical insurance in arrears goes first, then SS, then medicare etc. For weeks there might not be enough for a payment and either none of or a piece of the payment is applied. Then he earns again and a normal payment is deducted. How should we handle the none or little payments? How do we make up the loan payment..require him to write a check?

[Bill Berke]

The easy answer; write check. Missing payments as you have descibed is a PT. However, perhaps structuring the payments quarterly, rather than monthly, may eliminate the problem. Although quarterly payments are harder than monthly to operate.

[AndyH]

The loan should have been taken with documentation which included a loan agreement and written provisions in the plan document, or at least a written loan program outside the document.

Clearly the payments must be made one way or the other, but I suggest that you read the documentation, because it should provide you with guidelines as to when the loan is considered in default. It may require you to demand full repayment or else deem it to be in default (resulting in taxation among other problems).

[Kirk Maldonado]

I question the wisdom of having made the loan in the first place.

[Bill Berke]

Kirk your comment is dead on (again). And you point out one of the fiduciary resposibilties no one considers; whether or not the loan should be granted under the circumstances.

[LCARUSI]

Situation seems pretty straightforward to me...

You should request that the participant write a check to the plan to cover the loan repayment whenever the required repayment cannot be deducted from pay. If the participant will not or cannot make such payment, you should then follow standard loan default procedures.

[Guest Una M]

To Kirk & Bill!

When he was granted the loan, he was one of the more successful sales guys making $160,000, now he is in a rut and gets no check.

[QDROphile]

Don't forget that the loan continues despite a deemed distribution. The original deduction from pay arrangement stays in place and catches dollars when they do come through. Then the account will have basis.

[Bill Berke]

So, to add to your woes, this person with this wonderful loan was a highly compensated employee at the time!!? And how long has this person been an HCE? (this is rhetorical). If you are the plan administrator, get legal help. If you are not the PA, tell the PA to get help. And you have not identified the type of plan - which is also an issue. And the loan documents should define default. So, as I said, considering the Title I and Title II issues, call a lawyer real soon.

[Kirk Maldonado]

Why don't you just give the guy a raise big enough to cover his loan?

[AndyH]

That's an excellent suggestion.

Sorry to change topics for a minute, people, but Kirk, I'd sure like to hear your thoughts about poor sampat over in the DB board hot topic.

[Kirk Maldonado]

AndyH:

Thank you for soliciting my input. I genuinely appreciate the comment, but I must confess that I can't add anything of value to the thread.

While I am conversant with the different actuarial cost methods, I don't get involved in the small plan market at all. My fees are far too expensive for employers who view plans as a tax shelter devices. Also, a lot of the planning involves number crunching, which is done most economically by an actuary.

[AndyH]

Kirk,

Understood. But if anyone ever needed pro bono work ......!