Treatment of outstanding plan loans when Employer shuts down.

[Guest LMalone]

Company sponsors a DC with outstanding loans. I don't think it matters, but it could be a 401(k) or a PSP. Company shuts down and files a 5310 for its plan. During the waiting period for an approval letter, how are loan repayments handled? There is no more payroll.

Here are a couple of thoughts:

1) Amend the plan to provide that, as soon as administratively possible following the plan termination date, any participant with an outstanding loan will receive a partial distribution in an amount sufficient to offset the amount due, and the remaining portion will be distributed after IRS approval. (Participant is fully vested, of course, due to plan termination.) It seems we would have a valid distributable event - plan termination - and we would be following the plan's terms (as amended) to distribute to a segment of the participants.

Possible problems - would this distribution option have to meet the 410(B) BRF test? Would this idea be any better if a full distribution (and offset) was made to participants with loans?

2) Another idea - suspend payments until 5310 approval. Unless there is an exception to the regs, the cure period would most likely expire before IRS approval of the 5310.

There is no new plan to roll in to.

What can be done?

I would appreciate any insights from out there in "Loan Land."

[QDROphile]

The plan could provide for payment by other means, such as receipt of periodic checks from the borrower. Yes, it is more administrative trouble than payroll deduction, but it seems like a reasonable gesture under the circunstances. If the borrower does not want to pay the loan, the usual default consequences apply.

You could amend the plan to allow all participants to elect to take a distribution of some percentage (how about 75%?) of the their accounts prior to receipt of a determination letter. That would preserve the plan while you wait for the determinationletter and provide room to allow a cash distribution to coincide with a distribution of a defualted loan. I assume that all the participants have terminated employment in the employer controlled group.