What happens to a 401k plan loan to a participant who happens to also be Trustee and subsequently terminates employment?

A participant who also happens to be a Plan Trustee took out a plan loan a couple of years ago.  The participant terminated in 2020, but was not removed as a Trustee until 2022.  The documents specifically provide that a party in interest under Erisa 3(14) who terminates employment with an outstanding loan will be treated as an employee whos employment has not terminated and for any other applicants, the loans become due and payable at termination.  Our question is this.   At the point this former employee was removed as a Trustee is that loan due and payable?

Thank you

3 hours ago, jkharvey said:

At the point this former employee was removed as a Trustee is that loan due and payable?

Based on what you presented, I would say yes. I am curious about that language as it would appear to discriminate in favor of trustees who are often HCEs.

2 hours ago, Bird said:

I am curious about that language as it would appear to discriminate in favor of trustees who are often HCEs.

I think that cite is in the context of the prohibited transaction exemption for participant loans but I would be surprised if it can be also properly construed to mean the person is considered an ongoing employee for purposes of avoiding an accelerated loan payoff due date or, absent repayment, loan default. Probably not a can of worms they want to open, especially if making due and payable now, but I don't know if I'd sleep easy on this unless ERISA counsel had already opined, IMHO.

ERISA 3(14)(H) would include any employee of the plan sponsor as a party-in-interest.  Perhaps the intent of the plan language is that the prohibited transaction exemption for participant loans should continue to apply to a terminated participant who is no longer an employee but who continues loan repayments after termination (assuming the plan so allows).   

An interesting subject. Some discussion of this came up tangentially in the context of a plan termination, where of course the loan can be accelerated even for "parties in interest."

But I've always wondered about the "why" of this exception being discussed above. I always just accepted that it was the rule that parties in interest with an outstanding loan wouldn't necessarily have it accelerated upon termination of employment. Never seems to come up in real life. But does anyone's knowledge/understanding of this reach back to the reason(s) for this exception?

It’s not clear till the end for me. It seems that the answer is “yes”, but I’m not sure. It is better to ask a specialist about that.
You can talk to specialists from Mortgage Advisor London about this issue. I always address them when I need to decide on any of my loans. Sometimes, the contracts I have to sign are too vague, and it’s dangerous to sign them without consulting a lawyer. I don’t like when a contract is unclear, just like this one. It doesn’t state certain things directly, and that makes fluctuations possible. Next time check the agreement and the conditions beforehand.