What maximum repayment period do you like for a participant’s principal-residence loan?

A loan a participant uses to buy her principal residence may set a repayment period longer than five years (within what the plan’s governing documents, often including a written policy or procedure, allow).

But if the plan’s sponsor-administrator is listening to your advice, what maximum do you suggest?

50 years?

30 years?

20 years?

15 years?

Something else?

The longest repayment period the recordkeeper agrees to process?

And whichever maximum you suggest, why do you prefer it over other possibilities?

If asked, we recommend 15 years with 20 years being okay but not preferred.

We point out that:

• The maximum plan loan is $50,000 and the mortgage amount typically is considerably higher.  The plan loan often helps spread paying off realtor fees, closing costs and moving expenses.
• A $50,000 loan will have monthly repayment of about $400 for 15 years or $330 for 20 years.  Most loans for purchase of a primary residence are considerably lower since the individuals taking the loan commonly do not have a vested balance that exceeds $100,000.  For a $10,000 loan, the monthly repayments are about $80 for 15 years or $66 for 20 years.  These are small amounts (and even smaller when the payroll period is semimonthly or biweekly).  Processing loan repayments for small amounts can become an annoyance for payroll.
• The longer the loan amortization, the more the participant and/or employer likely will pay in loan administration fees.
• The longer the loan is outstanding, the more likely the participant will terminate with an outstanding loan balance which always seems to add time to process the distribution.

Thank you for this excellent reasoning.

And I like it even more because it supports advice I gave almost 20 years ago in my first year of private law practice after recordkeeping. For those clients that ask for my advice on plan design, I’ve suggested 15 years.

But I’m open to different or further analysis.

Can anyone suggest circumstances or factors that would support a longer repayment period—for example, 30 years?

most of our clients use 10 or 15 years... can't tell you why.  The recordkeepers probably have more info on this topic.

I rarely seen it longer than 20 years and often its 10 years - which has always been my recommendation if they really want to go longer than 5 years.  In these times, the probability of simply being employed for 10 years at the same employer has dropped considerably and odds are the employee will will have an outstanding balance when they leave.  And I find it rare that a participant can pay off a loan in full when it comes due before maturity.  So that just goes to Paul I's last point.   Most participants don't think thru all the financial consequences if they should suddenly incur a taxable distribution down the road. 

Also, some payroll providers may charge their own processing fees in additional to the financial / TPA recordkeeper's loan fees.   I do remember once that an owner had a desire to assist a particular employee (or family member) which resulted in 30 year term for home loans being added.  I think, maybe moreso in the past, that the adoption agreement would get filled out with a 20 or 30 year term automatically entered at time the plan is set up without anyone really having put a lot of thought into that decision (until an EE puts in a request).

If a payroll service provider charges its fee for processing participant loan repayments, who pays that fee--the employer or the employee?

Maybe I missed it above, but I always point to the uncomfortable scenario where even a 50 year old taking out a 30 year loan might be a tad unrealistic since they will be an octogenarian by the time they are done.  I don't know about y'all but I'll be living near the beach sipping Pina Coladas at noon long before then if everything goes according to plan 😂

State law, for the state of our TPA business, requires no more than 10 years for a loan not secured by real estate.  We dropped that 10-year limit into the loan policy for home loans.

hmm I really thought that anything to do with state law was pre-empted.  I remember for Florida there used to be some stupid stamp tax that ended up going away when it was clarified that ERISA pre-empted.  There are some lawyers on here though who might be better to clarify...

Even when a State’s law is ERISA-preempted, and even if unnecessary to meet the statutes’ prohibited-transaction exemptions, about participant loans some plans’ sponsors and administrators might look to local banking practices, including those affected or influenced by a State’s law, as some indirect information about what might be done by a bank “in the business of making comparable loans[.]”

See 29 C.F.R. § 2550.408b-1 https://www.ecfr.gov/current/title-29/section-2550.408b-1.

For a loan a participant uses to buy her principal residence, a maximum repayment period could be as short as five years or as long as 30 years, but the notes above suggest a consensus around 10-15-20 years.