Okay for a plan loan to be made to a terminated HCE when plan provides

[John A]

A plan document has a provision in the participant loan section about terminated participants. Terminated participants are allowed to get a loan from the plan only if they are a "party-in-interest" as defined in ERISA. Is this an allowable provision in a qualified plan? The provision seems like it would be discriminatory in favor of Highly Compensated Employees. If a terminated HCE requests a loan, does it have to be given to them due to how the plan document reads, or should the plan sponsor refuse to give the terminated HCE the loan because it would be discriminatory?

[MWeddell]

Making loans available to terminated employees who are still (1) participants and (2) parties in interest may even be required by ERISA's prohibited transaction excemption for plans that offer any participant loans. This stems all the back to a ERISA Opinion Letter 89-30A issued in October 1999. I don't recall what the IRS did, but somewhere in the 401(a)(4) regulations you'll find a fix that prevents this from being a discrimination problem.

On the other hand, I sure wouldn't assume that a terminated HCE is a party in interest without reading that definition carefully. Is the terminated HCE still on the plan sponsor's board of directors? What makes you think that he/she is still a party in interest now that he/she is no longer an employee?