Hardship criteria for Loan

I have a terribly persistent participant who is convinced that you cannot put criteria on obtaining a loan from your retirement plan.  Specifically, her plan requires hardship proof.  Does anyone have the IRS reg that states you can put these types of criteria on your loan program?

Burden of proof is on the person who asserts a restriction on plan design.

3 hours ago, Jennifer D. said:

I have a terribly persistent participant who is convinced that you cannot put criteria on obtaining a loan from your retirement plan.  Specifically, her plan requires hardship proof.  Does anyone have the IRS reg that states you can put these types of criteria on your loan program?

You don't need a reg and you don''t have to be a lawyer for an idiot participant. What you need to do is cite the document provisions (probably also in the SPD) and refer her to what the PLAN says,  If she doesn't like that, take it up with her employer.  If she think it is illegal, tell her to hire an attorney who will explain to her that it is NOT! Sheesh!  Don't make employee's problems your problems.

1 hour ago, QDROphile said:

Burden of proof is on the person who asserts a restriction on plan design.

The "burden" is simply to reference the pertinent part of the plan docs.  No problem to explain WHY it is OK to be there!

The person is asserting that the plan document should not have that feature, contrary to the belief of the poster, who is somehow involved in administration.  The poster should not have to scour to educate a plan participant who happens to hold a false belief.  The owner of the false belief has the responsibility to support that belief with authority.  The process of finding support for that belief will reveal both the falsity and the unreasonableness of the belief -- not the administrator's job.

Or, you can go to 2550.408b-1(a)(4), example 8.

Quote

Example 8: Plan P establishes a participant loan program. All loans are subject to the condition that the borrowed funds must be used to finance home purchases. Interest rates on the loans are the same as those charged by a local savings and loan association under similar circumstances. A loan by P to a participant to finance a home purchase would be subject to the relief provided by section 408(b)(1) provided that the conditions of 408(b)(1) are met. A participant loan program which is established to make loans for certain stated purposes (e.g., hardship, college tuition, home purchases, etc.) but which is not otherwise designed to benefit parties in interest (other than plan participants) would not, in itself, cause such program to be ineligible for the relief provided by section 408(b)(1). However, fiduciaries are cautioned that operation of a loan program with limitations may result in loans not being made available to all participants and beneficiaries on a reasonably equivalent basis.

Jennifer - the plans I work with have a separate loan policy, so this information might not be in the 'document'. you should be able to request a copy of that policy.

for example (your plan of course might be different)  the opening paragraph of the loan policy is

This document contains important information about the procedures for obtaining a loan from the Plan. The following rules shall apply to the loan program:

Procedure for Applying for a Loan If you are an active Participant in the A & B Marketing, Inc. 401(k) Plan, you may apply for a loan from the Plan. You must complete a Loan Application Form and submit the completed form and supporting materials to the Plan Administrator. Loan application forms may be obtained from the Plan Administrator. All loan applications will be reviewed on a uniform and nondiscriminatory basis and your loan will be approved if the Plan Administrator determines you have the ability to repay the loan, the loan is adequately secured and the loan meets the other requirements set out below.

.........

so if there is a paragraph that says 'hardship requirement' .....

In all the years I have worked I have never seen such a requirement, but that doesn't mean it couldn't exist, but as Kevin's cite above notes such a policy might be problematic.

The problem is that the participant did actually cite a poorly worded link on a Q&A from the IRS webpage, so we are trying to explain to her why the IRS said that and why our client can have this loan requirement.  https://www.irs.gov/retirement-plans/retirement-plans-faqs-regarding-loans

Tom is right that it isn't in the document per se, but it is in the loan policy.  We use Relius documents and the loan policy that generates with the doc and hardships are a permitted restriction, but that only shows up in the loan policy.  She just doesn't believe that's permissible by law because of what she found on the IRS website.  Frustratingly enough, our TPA business takes participant calls directly, so I can't just hand this over to the employer as we're expected to deal with these issues.  The employer doesn't know why they can do it, just that they wanted loans to be restrictive and we told them their loan policy can have these restrictions.  Now it's a "put our money where our mouth is" sort of situation.

Thanks for the cite Kevin!  That's exactly what I'm going to use in my e-mail to her!

The only other thing I would add is there is no requirement a plan even offer loans. it is purely an option. 

it is after all, supposed to be for retirement, and not, in many cases,  "I want to buy this 'toy' now and I am willing to forego my retirement $ because I have plenty of time to save later"

Wow. That IRS web page is incredibly not helpful, and clarifies why the participant is so passionate.  I don't know why the IRS even waded into that territory when their chief concern is with the taxation rules of IRC 72.  I suspect that the author of that essay might have had ERISA in mind, and having said that, I point out that the other thing the participant might yet stumble across in their zealous research is ERISA's requirement that loans be available to "all" participants on a reasonably equivalent basis.  I speculate that just about any limitation placed on the availability of loans could be construed by a participant (or a novice IRS FAQ webpage author) as being a violation of that requirement.

22 hours ago, Jennifer D. said:

The problem is that the participant did actually cite a poorly worded link on a Q&A from the IRS webpage, so we are trying to explain to her why the IRS said that and why our client can have this loan requirement.  https://www.irs.gov/retirement-plans/retirement-plans-faqs-regarding-loans

Tom is right that it isn't in the document per se, but it is in the loan policy.  We use Relius documents and the loan policy that generates with the doc and hardships are a permitted restriction, but that only shows up in the loan policy.  She just doesn't believe that's permissible by law because of what she found on the IRS website.  Frustratingly enough, our TPA business takes participant calls directly, so I can't just hand this over to the employer as we're expected to deal with these issues.  The employer doesn't know why they can do it, just that they wanted loans to be restrictive and we told them their loan policy can have these restrictions.  Now it's a "put our money where our mouth is" sort of situation.

Thanks for the cite Kevin!  That's exactly what I'm going to use in my e-mail to her!

You do not owe here a legal analysis. The plan owes her an answer (which you provide because you take participant calls) which is: the plan does not allow that. PERIOD.  You need to say: "these are the rules and they are correct and there will be no deviation.  If you think there is a violation of some rule or law, then you need to pursue that on your own. It is not our responsibility to write a legal treatise for you as to why the plan is correct.".  END OF DISCUSSION.  Let her pay someone to either steal her money or explain to her why the plan is right.  You should be done with this issue.

I agree substantively with Larry Starr.  However, any time a participant or beneficiary asks for a benefit, such as a loan without a specified hardship as provided by the plan, and is denied informally, there is always the consideration of reminding the person about the plan's formal claims procedures.  This will avoid a later assertion that the plan denied a claim for benefits without following the plan's claims procedures.  The explanation that the loan is not available should be in writing, or confirmed in writing, with the explanation that the negative answer is informal and the person may wish to submit a formal claim as described in _____ of the SPD.

And IF the plan's administrator treats a request as a claim, the administrator might include in its written denial:  "(i) The specific reason or reasons for the adverse determination; [and] (ii) Reference to the specific plan provisions on which the determination is based[.]"

 29 C.F.R. § 2560.503-1(g)(1)

https://www.ecfr.gov/cgi-bin/text-idx?SID=cb3fe814948182fe084261c4fffd397d&mc=true&node=se29.9.2560_1503_61&rgn=div8

18 hours ago, QDROphile said:

I agree substantively with Larry Starr.  However, any time a participant or beneficiary asks for a benefit, such as a loan without a specified hardship as provided by the plan, and is denied informally, there is always the consideration of reminding the person about the plan's formal claims procedures.  This will avoid a later assertion that the plan denied a claim for benefits without following the plan's claims procedures.  The explanation that the loan is not available should be in writing, or confirmed in writing, with the explanation that the negative answer is informal and the person may wish to submit a formal claim as described in _____ of the SPD.

Agreed. While you don't have to remind them of the formal claim process (because it is in the SPD) if they do file a claim you can reject it for the exact same reasons I suggested earlier. I don't agree that the plan can be faulted for rejecting a formal claim when none was made formally.  Here, form matters.

15 hours ago, Fiduciary Guidance Counsel said:

And IF the plan's administrator treats a request as a claim, the administrator might include in its written denial:  "(i) The specific reason or reasons for the adverse determination; [and] (ii) Reference to the specific plan provisions on which the determination is based[.]"

 29 C.F.R. § 2560.503-1(g)(1)

https://www.ecfr.gov/cgi-bin/text-idx?SID=cb3fe814948182fe084261c4fffd397d&mc=true&node=se29.9.2560_1503_61&rgn=div8

 

Agreed; if the PA decides to do so  I see no reason for doing so, but some might want to go that extra (but unnecessary) step. No problem if you do.