deny new loan for an an adopting employer about to leave?

In a PEO MEP, we are aware that adopting employer X is going to leave the services of the MEP's PEO sponsor - sometime in the next 2-15 days.  A participant, looking to get ahead of things, has requested a plan loan.  The plan document does not allow repayments after separation.

Can the plan sponsor deny the transaction on the grounds that repayments will not be able to be made, so the loan isn't in 'good faith'?  Or do they have to let it go through and then it just defaults at the scheduled time?

I don't have any information about when X is going to move their money out of the MEP, but it's at least 45 days out.  Maybe more - sometimes, they just don't bother moving the old money out (which is a different problem, and not necessarily for today).

Thanks.

Before plan loans became automated, some thought was supposed to be given to the requirement that there be a reasonable expectation that the loan would be repaid. The requirement for repayment through payroll deduction went a long way toward satisfying the requirement for expectation of repayment. Perhaps the plan terms, or loan policy terms, retain the language of reasonable expectation for repayment as a condition of initiating a loan. If so, the fiduciary would seem to have reason for doubt about the loan repayment under the special facts known to the fiduciary in this case. It all depends on terms of the plan documents, including a loan policy, if any, and the fortitude of the fiduciary, who presumably has the authority to interpret and implement plan terms in its reasonable discretion. The reason for the expectation that the plan will be repaid is to make sure that limits on distribution are not circumvented by plan loans that then go into default.

Consider also whether another employment-based retirement plan might accept a rollover of a participant loan, even if the receiving plan does not initiate participant loans; or refuse a rollover of a loan, even if the plan provides participant loans.

https://benefitslink.com/boards/topic/81756-rolling-a-loan-from-one-plan-to-another-new-plan-doesnt-allow-loans/#comment-358430

I'm not up on what all the issues are with moving out of a MEP, but I assume the withdrawal ultimately results in a spinoff into a new plan, in which case there isn't a distributable event anyway, correct? Unless the employer is not replacing and is terminating their "plan" - then never mind.

If the employer establishes a successor plan and there is ultimately a plan to plan transfer, would not that have to include any loans? If that is indeed the case, and if the successor plan was established timely for deferrals et al to start (w/o regard to when assets actually transfer) why couldn't the loan repayments be taken via payroll withholding per the amortization schedule and deposited into the successor plan before any default occurred?

Maybe the timing is just too problematic to navigate, or the employee is requesting the loan knowing it will default and they'll get what amounts to an in-service distribution without any tax withholding. Both reasonable reasons for a fiduciary to not approve the loan.

I agree with CuseFan, FWIW

There is a plausible path forward if the employer is establishing a new plan and that plan will continue administering the loans.  In a MEP, the employer is a co-fiduciary so a written representation that the loan will be permitted in the new plan could suffice to issue the loan.  Without that representation, then the loan should be denied and the participant informed they can take up the refusal with their employer.

One quibble: If a participant’s request for a participant loan is denied and the denied claimant seeks a review of that decision, wouldn’t ERISA § 503 claims procedure suggest that a review is with the multiple-employer plan’s administrator or its claims administrator—likely aligned with the professional-employer organization, not the service-recipient employer?