Refinancing a Loan From a 401(k) Plan

Good morning!  Is there a limit to the number of times a loan can be refinances in a 401(k) Plan?  I don't see anything in the regulations, but my document provider appears to have default language that limits the number of refinances to twice.  I wanted to make sure that we could remove that language without there being an issue.

Thanks in advance!

Not that I know of, but yuck.

5 minutes ago, Bill Presson said:

Not that I know of, but yuck.

Thanks!  That's what I thought, but I just wanted to confirm

Is the provision limiting participant loan refinancing:

in a procedure document?

or in the IRS-preapproved document (whether in the basic plan document, or in the choices the adoption agreement presents)?

If the provision is in the IRS-preapproved document, would a user’s change defeat the user’s reliance on the IRS’s opinion letter?

2 minutes ago, Peter Gulia said:

Is the provision limiting participant loan refinancing:

in a procedure document?

or in the IRS-preapproved document (whether in the basic plan document, or in the choices the adoption agreement presents)?

 

If the provision is in the IRS-preapproved document, would a user’s change defeat the user’s reliance on the IRS’s opinion letter?

It's in the Loan Policy, not the actual Plan Document.  Is the loan policy a pre-approved document by the IRS?  I didn't think it was.

You’re seeing the distinction I invited you to think about.

Even if one is confident that nothing in ERISA’s title I or the Internal Revenue Code requires a provision, one might be reluctant to change a provision from an IRS-preapproved document if doing so might defeat the user’s reliance on the IRS’s opinion letter.

As I understand the IRS’s preapproval regime, the IRS does not review, and an IRS letter does not opine on, beyond-the-plan procedure documents, such as a separate participant-loan procedure.

I think it's a election in most pre-approved documents Peter and changing it would not likely take it out of pre-approved status.

That said wouldn't the fact that loans still need to be repaid in the original 5 year time frame effectively limit the number of times a loan could be refinanced? I mean I guess it theory you could refinance it as may times as administratively feasible but as Bill Preston so eloquently puts it - yuck.

On 12/8/2021 at 1:41 PM, Lou S. said:

That said wouldn't the fact that loans still need to be repaid in the original 5 year time frame effectively limit the number of times a loan could be refinanced? I mean I guess it theory you could refinance it as may times as administratively feasible but as Bill Preston so eloquently puts it - yuck.

The regs allow extending the length of the loan beyond the original 5 year period if certain conditions are met.  There are two options, yuck and double yuck.  See 1.72(p)-1 Q&A 20 (a)(2).

ASC's cycle 3 401(k) document includes an optional loan program that allows restrictions on loan renegotiations, provided the ability to renegotiate is available on a non-discriminatory basis.  It also has an optional to not allow renegotiation.

Without doubting the wisdom of BenefitsLink mavens’ yuck and double-yuck observations, I’d like to understand why something is impractical or difficult.  (I have great respect for those who work in recordkeeping operations.)

If one or more methods for refinancing a participant loan are described in the tax-law regulations, one might think mainstream recordkeeping software would be programmed so a user could use those methods.

Am I ignorant about the software?

Or if the software can do it, are there other reasons it’s impractical or difficult?

7 minutes ago, Peter Gulia said:

Without doubting the wisdom of BenefitsLink mavens’ yuck and double-yuck observations, I’d like to understand why something is impractical or difficult.  (I have great respect for those who work in recordkeeping operations.)

If one or more methods for refinancing a participant loan are described in the tax-law regulations, one might think mainstream recordkeeping software would be programmed so a user could use those methods.

Am I ignorant about the software?

Or if the software can do it, are there other reasons it’s impractical or difficult?

The retirement plan software that I've been exposed to over my career (ASC, Relius, Datair, FTW), do a decent job of creating an amortization schedule and setting up a loan. But they are not designed like bank loan software. So changes are incredibly clunky at best. It's also very difficult to get the TPA admin software and a recordkeeper's software to agree to $ with a single loan that never changes.

So, any refinance is very manual, fraught with probable errors and guaranteed to be a revenue loser to the TPA.

1 hour ago, Peter Gulia said:

Without doubting the wisdom of BenefitsLink mavens’ yuck and double-yuck observations, I’d like to understand why something is impractical or difficult.  (I have great respect for those who work in recordkeeping operations.)

If one or more methods for refinancing a participant loan are described in the tax-law regulations, one might think mainstream recordkeeping software would be programmed so a user could use those methods.

Am I ignorant about the software?

Or if the software can do it, are there other reasons it’s impractical or difficult?

It has been a very long time since I did loans in a 401(k) plan.  It was in a balance forward environment so I didn't have the coordinate with a reocordkeeper issues and we still hated refinance loans. 

You ended up regularly with simple practice issues.   You get the whole thing set up and within the rules regarding the limits and the paperwork signed.   (You got into all kinds of disputes on how to compute the maximum amount.   It seems like it has been a while be easily 10 years after the rules changed you could see regular threads on this board over a dispute on how to compute the refinance maximum.)  Say you are doing the new loan paperwork today.   All the approvals happen will quick and the new loan goes off fine.  You are told the first new payment will come out with the 12/24 paycheck for example.    So you set up the amortization with the first payment for that day.   Something goes wrong at the client's HR level and the old payment comes out of their check not the one that reflects the new amortization.   Now you have a wrong first payment.   Some kind of silly adjustment needs to be done to the whole thing.  Money loser for the TPA! 

If we sat around with a number of TPAs who do this for a living now they could most likely give you horror stories of seemingly small things that can go wrong doing so that just eat up time that is hard to bill to the client.  

Loan processing as far as I can tell might be the single lowest margin thing a 401(k) TPA does.   A refinance just makes that worse.  

Thank you for the helpful information I was looking for.

(When I was inside counsel to a recordkeeper, an employer's payments seldom followed the loan-repayment schedule.  Not satisfied with what the software did, the operations people asked me(!) to invent a rule for crediting the payments.  I don't remember what we did.)

I think I've posted a spreadsheet that  helps with the determination of the maximum, but does not address refinance payments.  Maybe somebody else can post a link to the file.

Refinancing sounds really complex. 

May be time for some to consider updating loan software/processing to 21st Century functionality.   

I can't remember ever refinancing an existing loan - don't think we even had a process.  However, that never stopped a participant from taking a second loan (within the 72(p) limits) so they could use the principal to adjust payments, pay off the existing loan, etc. 

It is one reason why I was never in favor of "cooling off" periods or limiting loans to one per participant, etc. For example, when onboarding individuals, we used to inquire whether they had a loan outstanding from a predecessor employer's plan.  If they did, we welcomed them by encouraging they consider a process where they could avoid leakage, potential income and penalty taxes, and "rollover" the outstanding loan by leveraging our plan's loan procedures.