Rebalance 401(k) Account / Participant Loans

Here is an interesting question.  Participant has $10,000 of Fund A in his 401(k) account and $5,000 of a participant loan in his 401(k) account.  He also has $7,000 of Fund A in his Match account. 

Can I have the participant sign an investment election to rebalance his portfolio and shift $5,000 of Fund A from his Match Account to his 401(k) account, and then transfer $5,000 of his loan from his 401(k) account to his match account.

His 401k account would be reduced by the $5,000 loan leaving, but increased by $5,000 of Fund A being transferred in. As a result, the account has the same balance in the end.  The same thing happens in reverse order on the match side.

Is there anything in a reg or whatever that indicates the source of a loan can never be altered?  There is much in the rules that is quite clear that loans are INVESTMENTS like any other.  A consequence of that definition is that this should be doable.

I don't know if the loan even comes into play here. Under what circumstances (other than an in-plan Roth rollover) would a participant be able to change the money type of funds that are in the plan? It sounds like this proposal would let him take a $5,000 loan from 401(k) money and repay it as matching money. I don't believe that would count as an investment change or portfolio rebalancing, regardless of whether a loan exists or not.

If it were a case where he had his 401(k) money in Fund A and his matching money in Fund B, I don't see why you couldn't say that the loan taken from Fund A can be repaid instead to Fund B, but that doesn't turn it into matching money; it's just 401(k) money that's now sitting in Fund B. And since you mentioned both money types are invested in Fund A, it doesn't sound like that's the situation here.

Well, I guess my point is, where is the clarification that a loans sources are fixed at the date of the loan? Where is it "ruled" that you cannot rebalance a loan into other sources in exchange for mutual funds?

If for example, Participant A had $5,000 in Fund A in his 401k account, and $5,000 in Fund B in his match account, he could clearly "switch" and put his $5,000 of Fund B in 401k and $5,00 of Fund A in Match.  Because loans are INVESTMENTS, why can I not do the same thing?

A "pension celebrity" just said he doesn;t see a problem with it. For anyone who wants to steal my idea (I'm giving it to you anyway, so need to steal it!) he said just make sure you take into account accrued interest at the date of the "transaction" when figuring out how much money to shift around.

Austin, you have me lost....

I've only seen a loan investment as a balance to be paid.   Or to say another way, the loan investment is not held as a mutual fund or other investment vehicle.

So if Participant A had a balance of 20,000 (all sources) and wanted to take a loan of 10,000.  All of it was in Fund A.  (10,000 in deferral, and 10,000 in match)  The loan was prorated across all sources, to be paid back to said sources.  Fund A would have 10,000 sold to cash for the loan check.   Source wise, I see Fund A as 5,000 in deferral, Fund A as 5,000 in match, and 10,000 in loans.  (20,000 total balance) 

If Participant A wanted to rebalance his investments to 2 new funds, the account would show 5,000 in Fund B, 5,000 in Fund C, and 10,000 in loan investment. Still 20,000 balance.  Source wise, it would show Deferrals as 2,500 in Fund B and 2,500 in Fund C.  It would show match as 2,500 in Fund B and 2,500 in Fund C, and 10,000 in loan investment.  Still 20,000 balance.

I don't or wouldn't see any reason to move anything around.

Does your recordkeeping system show the loan as invested in actual Funds? 

In my scenario above, the participant would be able to rebalance and transfer at will.  Daily plan, of course.

6 minutes ago, Mr Bagwell said:

Does your recordkeeping system show the loan as invested in actual Funds? 

I'll just focus on this question. Yes, absolutely.  And it must because the loan payments must go back to the originating source.  I don;t know if that answers your other questions.

2 minutes ago, austin3515 said:

I'll just focus on this question. Yes, absolutely.  And it must because the loan payments must go back to the originating source.  I don;t know if that answers your other questions.

Yes, that should answer it.

Thanks

Our documents typically specific which sources are available for loan. Some say pro-rate across available sources, others restrict it to 100% vested sources, others restrict it to deferral (pre-tax and or Roth), and other still restrict to Non-deferral sources. Other have a hierarchy for loan proceeds sources. 

I've never heard of the participant getting to choose which sources the loan is taken from  - or in this case repaid to. Which is what you seem to be asking, if I'm understanding it correctly. 

For example:

If the loan is from an employer source and the loan is defaulted and the plan allows distributions from ER sources the loan can be offset and the plan does not have to track it. If the loan had been taken from deferrals, depending on the participant's age, offset might not be an option. Then the defaulted loan would have to be tracked until an offset event occurred. 

Similarly, if a participant is allowed to take a loan from a non-vested source, and then defaults on it - how would you propose the plan account for it? If your scenario is allowed, a person could take a loan from their deferral $, transfer the loan to an unvested match source, then quit. All sorts of problems would ensue. 

I'll just point out that I am doing this as a result of some extenuating circumstsances.  We're not making this a normal part of the plan.  I would not be doing this if it wasn't a home-run solution for a particular set of problems that I had on a plan.

3 minutes ago, austin3515 said:

 We're not making this a normal part of the plan.  

Are you making this option available for a short time only to a specific employee? Cause that seems like something that would need BRF testing....and could easily be discriminatory (assuming it's even allowed - which I'm of the mind it's not - but I open to being convinced otherwise). 

Thats a good point, one that might have occured me (I hope!) but for the fact that I know he is an NHCE.

My concerns are similar to @justanotheradmin...  

Do the sources have the same restrictions?  Otherwise I wonder if it could create  a distribution disguised as a loan kind of situation, similar to taking a loan with no intention to repay...

If I have $10,000 PS and $10,000 401(k)

In service is allowed at Age 50 for PS and 59 1/2 for 401(k)

P is 52, and takes a loan of $10,000, split evenly over PS and 401(k) 

P then transfers $5,000 loan "investment" from PS to 401(k) in exchange for $5,000 cash

P then takes an in-service from PS of $10,000, leaving the account with $5,000 cash

P then defaults on loan obligation to 401(k)

Is it different if P is 62 and could take an in-service from both sources?

So is the question ultimately "where does it say that you can't arbitrarily move plan assets from one money type to another?" (I don't know the answer offhand, but it must be out there!)

If this were permitted, what would stop a participant from taking non-vested employer money out as part of a loan, then declaring that they'll be repaying the loan as 401(k) money as a result of investment "rebalancing"? As an example...

A participant has a 401(k) balance of $5,000 and a PS balance of $5,000; he's 0% vested in the PS money. He takes a $2,500 loan, which is pro-rated as $1,250 from 401(k) and $1,250 from PS. He "rebalances" his investments, declaring that the entire loan is now a 401(k) directed investment to be repaid to the plan as 401(k) money. He pays the loan back immediately, and now has $6,250 in his 401(k) account and $3,750 in his profit sharing account. He terminates the next day and takes his vested balance, which has jumped from $5,000 to $6,250 overnight simply because he "rebalanced" his loan.

(Edited to fix loan amount, obviously he can only take 50% of the vested portion!)

My last comment on this is as follows:  Those of you who are nay-saying are taking the position that a loan and a mutual fund are different with respect to rebalancing.  My position is that it is no different.  The whole point of all the loan rules (commerically available interest rate, etc) is specifically because it is an investment. 

Here is an example that nicely underscores my point.  Let's assume a small plan has 2 brokerage accounts for one participant.  One account is for employee money and the other is for match.  Let's say there is a corporate bond worth $10,000 in the 401k brogerage account.  Now, if the partcipant wants that corporate bond in his match account.  So he transfers $10,000 worth of mutual funds into his 401k account, and moves the $10,000 bond into his match account.

Now if you say that's fine, I just say it's the same scenario precisely to what I have described above.  A loan is a loan is a loan.

49 minutes ago, austin3515 said:

My last comment on this is as follows:  Those of you who are nay-saying are taking the position that a loan and a mutual fund are different with respect to rebalancing.  My position is that it is no different.  The whole point of all the loan rules (commerically available interest rate, etc) is specifically because it is an investment. 

Here is an example that nicely underscores my point.  Let's assume a small plan has 2 brokerage accounts for one participant.  One account is for employee money and the other is for match.  Let's say there is a corporate bond worth $10,000 in the 401k brogerage account.  Now, if the partcipant wants that corporate bond in his match account.  So he transfers $10,000 worth of mutual funds into his 401k account, and moves the $10,000 bond into his match account.

Now if you say that's fine, I just say it's the same scenario precisely to what I have described above.  A loan is a loan is a loan.

I hate to be a nay-sayer! I think calling a brokerage account a "401(k)" or "match" account is confusing matters. Say your example participant had $10,000 in corporate bonds in Account A and $10,000 invested in mutual funds in Account B. You can call Account A "401(k) account" and Account B "match account" but moving money from Account B to Account A doesn't (for example) remove the vesting requirement and impose age 59-1/2 withdrawal restrictions from that money, or vice versa.

If he has $10,000 in Account A as 401(k) money and $10,000 in Account B as match money and takes the loan out from Account A, he can repay it to Account B if he chooses, but that doesn't mean it's match money. It's 401(k) money that's being repaid to an account that happens to be referred to as the "match account".

Edit: am I completely misreading what you're suggesting? It's been a long day!

Well my brokerage account example was merely to make it plausible to move the bond between the accounts.  And we definitely have clients who earmark a brokerage account for employee money and a separate one for employer money, and I see know reason why securities of equal value could not be shifted between them.

But now you've made a liar because I said the last one was my last post!

So to keep things simple, Austin 3515, say you have two money sources in a non-safe harbor 401(k), (a) nonelective/"profit sharing" and (b) elective deferral. Plan of course has separation from service or age 59-1/2 distribution restrictions for elective deferral, lets you take nonelective/"profit sharing" at any age as long as you are 100% vested. Pre-loan, participant has $50k elective deferral, $50k nonelective/"profit sharing." Takes a loan for $50k. Suppose the plan document does not address where the loan is taken from, but in operation the recordkeeper in next statement shows the loan is allocated 50/50 between the elective deferral and nonelective/"profit sharing," and shows the mutual fund investments also as allocated 50/50, at least immediately after the loan before any new contributions of either type have been made. Suppose they have always done it this way, and do it that way for all other participant loans.

Participant is 100% vested and needs $50k cash for some reason. First answer, "Sorry, you have only $25k in your nonelective/"profit sharing." But then you think about it a little more and say, "Well, tell you what I will do. Just for you, I will swap the half of your loan that is in the nonelective/"profit sharing" into your elective deferral, and the half of the mutual funds in your elective deferral into your nonelective/"profit sharing." Then you can clean out the $50k that will now be in your nonelective/"profit sharing." Is that an example of what you are talking about austin3515?

I think most plans are going to have language or rules that require the loan to be allocated across all money types, and so the IRS in such a case could argue that your "swapping" was really just a disguised $25k distribution from the elective deferral account. In the absence of any such language, I can still see the IRS arguing that you are stuck with how the TPA operationally allocated it when the loan was disbursed, but don't know if they would win.

Or maybe the above is not what you are asking?

Yes, but this is what I said earlier about this:

5 hours ago, austin3515 said:

I'll just point out that I am doing this as a result of some extenuating circumstsances.  We're not making this a normal part of the plan.  I would not be doing this if it wasn't a home-run solution for a particular set of problems that I had on a plan.

I've never heard where you can move money between sources (deferrals vs match vs profit sharing) as some have attached restrictions on loans/withdrawals/vesting, etc that others do not.  You can move money between funds/investments.  The loan however is sourced from specific sources and goes back prorata to those sources. I can't say I've ever seen loan balances invested in those same funds, because in the end, it's play/phantom money that does not exist in the bank/trust.  

But I am a dinosaur and your use of funds and accounts is not how I would have defined them...  A participant's total balance is a matrix/table of  sources and funds. Other than moving in our out of a LOAN source (by taking a loan or repaying it), I can't say I've seen reclassified sources except some vague rememberance of being able to reclassify some contributions back in the olden days of ADP/ACP nondiscrim testing (way before safe harbor and the nondiscrim rule changes)..... and if I remember correctly, the employer could only move match into deferral since it became 100% vested....but I could be wrong on that...it was the 90s after all!

Well, maybe I'm pointing out the obvious - but plenty of plans/sponsors/participants have extenuating circumstances. I think we've likely all lived through a recession or two, seen companies go bankrupt, lay off workers, walk away from unfunded plans, seen business owners lose their homes etc. Just because there are extenuating circumstances doesn't mean the action is allowed. 

Also - what does the loan note say? Was there any other loan paperwork (such as payout instructions) that specified the sources and repayment process?

The one we use references a security interest in the vested interest of the Participant's benefit in the plan. If the participant is not fully vested in the match source you propose using - or vested enough to cover the loan balance - the other arguments against notwithstanding, I don't see how the loan could be shown as being part of non-vested money. 

Also you'd have to make sure the plan even allows for different investments by source. I've seen participant requests to invest Roth money differently than pre-tax money for example, and not all recordkeepers are able to accommodate that, even if the plan wants to allow it. If you are using balance forward brokerage accounts that wouldn't be an issue. 

I'm still of the mind it's not permitted, but even if permitted there would be numerous issues. 

If I can sum up all of the concerns described above, they all come down the same interpretation which is:  Loans are not investments. 

But that is not the case.  Loans are investments.

That's why I'm thinking some of us (including me) might be misunderstanding what you're suggesting. I don't think anybody believes loans aren't investments -- well, I hope not, anyway!

As long as the loans are being repaid under the same money type as they were taken out from, I don't think what you're suggesting is an issue. It just wasn't clear to me whether what you're proposing is that the loans can merely be repaid to a different investment option than the one they were taken from (which I think is reasonable) or whether they can be shifted to another money type entirely (which I think is less reasonable).

In other words, based on the wording in your original post

Quote

Can I have the participant sign an investment election to rebalance his portfolio and shift $5,000 of Fund A from his Match Account to his 401(k) account, and then transfer $5,000 of his loan from his 401(k) account to his match account.

my question would be "Is the end result that the participant now has $5,000 of matching money in his '401(k) account' and will repay $5,000 of 401(k) money to his 'match account'?" If the answer is yes then I think this is doable as long as you've got good enough notes to explain to Future Austin why this participant has 401(k) money in the "match account" and vice versa. If the answer is no, I don't think the reasoning that it's okay because the final balances will ultimately work out the same (assuming the loan is fully repaid, and only because the participant is fully vested and happens to have all money invested in Fund A) is especially reassuring.

I really think my transferring the bond example above is about as clear as I can possibly be.  You just change the bond to a participant loan in my example.  And I said there, but will repeat.  There is no difference between a bond and a participant loan, because they are both loans.

A lot of you keep suggesting too that I'm allowing impermissible distributions, etc., buit if you read carefully the balance in 401k never changes.  I know some reports will not report the loans broken out in their respective sources, and insted just report the loan in total, but the loan is allocated to soruces nonetheless, and my 401k balance in my examples never changes. 

So - Here's a question - is this really necessary? Does the plan allow for more than one loan?

Based on your fact pattern

Deferrals $10,000 real money, $5,000 Loan = Total $15,000

Match $7,000 real money = Total $7,000. I'm going to assume 100% vested. Analysis would obviously be different if not. 

Total Account balance $22,000

Maximum Loan 50% = $11,000

Current outstanding loan balance $5,000

If the plan allows for a new loan - New loan maximum amount $6,000 (assuming there isn't an issue with the high loan balance within the 12 month lookback period). 

Take a NEW loan from Match - repay the old loan into deferrals, problem solved. 

I'm sure the actual numbers are different, but if the total account balance is large enough, it might be doable. 

a) Participant has max # of loans already

b) The plan sponsor has agreed to pay for the tax impact of the default so the participant is whole anyway. Because taxation is unavoidable anyway, they didnt want the guy to have go through all that trouble. PLUS we would end up with basis in the plan, and my feeling is that basis is almost never accounted for correctly in the long-term.

c) We just wan the loan and the problems with it to go away.  Hence trying to rebalance the account to put the loan in a source that is currently distributable.

So if match is a distributable source why not take a distribution from Match - and then use the proceeds to pay off the loan?

Mandatory withholding would make the distribution larger, but if the ER is willing to front the 20% to go towards repaying the loan, it doesn't have to be. 

For example $5,000 distribution, $4,000 to participant after withholding. ER gives Participant $1,000, participant uses the $4,000 + $1,000 to repay the loan. 

It would avoid the rebalance question entirely. 

Here is another example. Participant A has $10,000 of Match and all of it is allocated to an illiquid privately held stock.  Participant also has $10,000 of liquid mutual funds in his 401k account (yes, of course this can happen, just because it never would doesn't mean it could not).  Now the Match says you can take everything after 5 years of participation, and the 401k says you have to be 59 1/2 and this guy is only 40.  And he wants an in-service distribution.

How do you all feel about moving the illiquid investment sourced to match into the 401k account, and transferring the liquid investments sourced to 401k  into the match? If this is OK, then my scenario should be ok.

If you're not sold, how about this?  The participant is magically able to sell the illiquid investment to cash, and turn aorund and by liquid investments within the match account.  He then sells all of his liquid funds in his 401k account, and buys the same illiquid investment back the very same day, all within his 401k account.  So now I have moved my illiquid investments to my 401k account, and my illiquid investments to the match account.

If that works (and I cannot fathom a suggestion that the previous paragrpah is not allowable) then merely cutting out the middle step of liquidating to cash should be moot, and back we go.

8 minutes ago, justanotheradmin said:

So if match is a distributable source why not take a distribution from Match - and then use the proceeds to pay off the loan?

Mandatory withholding would make the distribution larger, but if the ER is willing to front the 20% to go towards repaying the loan, it doesn't have to be. 

For example $5,000 distribution, $4,000 to participant after withholding. ER gives Participant $1,000, participant uses the $4,000 + $1,000 to repay the loan. 

It would avoid the rebalance question entirely. 

He ends up with 2 taxable distributions - one for the loan defaylt and one for the distribution.  That;s twice as much in taxes.  And I still end up with basis which is "bad" (in my opinion).

Could he move $3,000 from fund A in deferral to fund A in his match account?  No.

If the loan is an investment, why do you think he could do ostensibly the same thing?

Such a setup could be rife with abuse.

What if there were no basis in deferral.  Loan was taken 100% from PS.  Now the participant transfers part of the loan obligation to deferral.  Is that kosher?

19 minutes ago, austin3515 said:

a) Participant has max # of loans already

b) The plan sponsor has agreed to pay for the tax impact of the default so the participant is whole anyway. Because taxation is unavoidable anyway, they didnt want the guy to have go through all that trouble. PLUS we would end up with basis in the plan, and my feeling is that basis is almost never accounted for correctly in the long-term.

c) We just wan the loan and the problems with it to go away.  Hence trying to rebalance the account to put the loan in a source that is currently distributable.

I guess I missed that the loan was already defaulted. 

Plans track defaulted loans every day. The fact that it might turn into after-tax basis if payments are ever made isn't a new thing. For me, its not a big enough pain to consider a very unorthodox approach to loan management. 

If you are looking for agreement/ validation or a blessing to your approach - I don't see much here. But the boards have been wrong before, and the IRS does sometimes surprise the industry in how it chooses to interpret things. So who knows. I'd love for someone to pose your question to an IRS panel at a conference and see what they say.

I would take this as a lesson to design plan loan policies more carefully, including which sources are used for loan proceeds from the outset. One TPA I know of encourages a hierarchy where loan proceeds are taken first from employer money sources for this very reason. It is often easier to offset than if the loan was taken from deferral. 

As I said before, a "pension celebrity" that you all know said this would work.  And that is more than good enough for me!

36 minutes ago, BG5150 said:

Could he move $3,000 from fund A in deferral to fund A in his match account?  No.

This question overlooks the whole point of all of this which is the other side of the coin.  Could $3,000 in Fund A, 401k, be switched with $3,000 of Fund B in Match.  And the answer is "yeah, obviously."

Please tell me no one disagrees with THAT?

I wonder if you could compare this loan investment more equally to something like a frozen GIC fund. That is you know standard payments of return are going to be paid out on a specific calendar basis, but the investment itself can't be liquified.  So there are no "funds" to switch.  Fund A and Fund B are not equal to this Loan Fund you've created.    You are playing with paper money, not real dollars. That's what is different between other funds and loans. The other funds are backed by real $s. 

The only earnings that this Loan investment is getting (or not) is the interest paid back by the employee.  I just don't see this loan investment equal to other funds/investments.  One can't choose to invest 100% of their 401k balance in the loan investment fund....and honestly trying to make it equal to other plan investments seems risky.  In no general way are participants choosing a loan as a good investment strategy.  Maybe (although I personally don't think so) a good personal financial strategy when extra $s are needed, but not really an investment strategy.  Moving any money between sources has many implications (regardless of what fund they are in)...I think that is my sticking point....it's not about funds, it's about sourcing. The  loan was sourced from specific groups....(in our plan, SH, Match and PS can't be used for loans only Employee money - deferrals/Roth/Rollover, so all is 100% vested, but the Rollover has much easier access to distributions than the deferrals/roth.....moving money between would mean changing the characterization of that money....again regardless of any investment it was in)

I personally wouldn't want to be involved in deciding it this way..... I don't know who your guru is, but if you trust them and rely upon them, then do what you are hoping to do....I'd just make sure my E&O/EPLI was up-to-date.....

On 8/30/2019 at 11:00 PM, hr for me said:

.I'd just make sure my E&O/EPLI was up-to-date....

For treating a loan like an investment?  And in the face of no plan provision, no regulation, no IRS Q&A, no promissory note provision, no absolutely anything beyond conjecture to suggest that source is as intrinsic to that investment as its interest rate (which is plainly stated in the legally binding promissory note)?  That's really the position here, that somehow source is intrinsic to the loan.  You can;t just say that it is without something written into something legal that makes it so (or a regulation that makes it so, or an IRS position). 

Yeah I don't think this is in the same category as botching the top-heavy issue on a 401(k) only plan. Not even close.

And I would still like others to clarify that you can most definitely trade Fund A in 401k for an equal sum of Fund B in match.  There has been ample suggestion in this thread that that is not possible, but again it implies that somehow source is intrinsic to an investment--it is not.  I'd appreciate it if others would say so if you agree.  This is just totally uncontreversial, but it is the foundation of my argument.  I saw more than one suggestion that what I have suggested is impossible because the funds are somehow "stained" by their source.

So, Austin, could I exchange my 0% vested Fund A in Match to a 100% vested Deferral source in fund B?

What happens when I exchange my guaranteed by statute 100% vested contribution to deferral to a vestable profit sharing source?

What's the difference between your question and this question:  "can I change how my 401k is invested from Fund A to Fund B? And can I also change how my match is invested from Fund B to Fund A?"

A qualified plan "account" for a participant is not like a bank account or, say, a simple brokerage account, everything in one bucket, so to speak.  It contains sub-accounts, one each for every source in the plan.  You cannot switch between sub-accounts, but you can within them.

If you could switch between sub-accounts, why wouldn't everyone move all their unvested profit sharing money to their deferral account?

29 minutes ago, BG5150 said:

If you could switch between sub-accounts, why wouldn't everyone move all their unvested profit sharing money to their deferral account?

In this example, the funds are money, and money is fungible.  You're question is framed in the context of somehow getting a boon for the participant by somehow circumventing the vesting rules.  This ignores the fact that you are transferring an equal sum of money into the profit sharing account.  A you know, people rebalance their accounts in participant directed 401ks all the time, and can indeed switch their accounts between Fund A and Fund B in different sources as I described.  So this actually happens, so it is unclear to me why you would suggest it cannot and therefore presumably does not happen.

And how can you account for the existence of pooled accounts where all  investments are commingled and there is NO attachment of source to any underlying investment?

18 minutes ago, BG5150 said:

A qualified plan "account" for a participant is not like a bank account or, say, a simple brokerage account, everything in one bucket, so to speak.  It contains sub-accounts, one each for every source in the plan.  You cannot switch between sub-accounts, but you can within them.

If you could switch between sub-accounts, why wouldn't everyone move all their unvested profit sharing money to their deferral account?

Could both arguments be correct here?

1. There is nothing specifically prohibiting transferring of the loan asset between sources as it is an investment.  The balance of each source is the same after the transfer.

2. you cannot "vest" unvested assets by moving them from one source to another, just like you cannot remove distribution restrictions by moving them to another source.

So, if you were to rebalance, there is no failure until the assets that moved does something they cannot do, like a distribution before age 59 1/2 or distributing unvested assets.  

There are other examples of things things that are permissible when viewed only on its own, but a failure when all facts and circumstances are considered.  For example, you could terminate a plan and distribute all assets, you could also start a new plan.  Each action viewed by only on its own is permissible, but when considered together the distribution is a failure if there is no other distributable event.  If you move 401(k) assets to profit sharing through Austin's loan rebalance argument, are there any problems if the loan is fully repaid (ignoring interest credited to the source)?  

Austin, I think you can do what you suggest.  The issues would be whether the plan or loan procedures allow the participant or someone else to choose the source(s) for the loan...presumably at the time the loan is made.  If so, then I don't see why they couldn't change it (the source) later.  If not, well, I don't see why the policy couldn't be changed.  The whole thing seems like a big PITA but I get the reasoning - the alternative being a bigger PITA (maybe).  I'm not sure I would "go there" but I give you some points for cleverness.

Loan is a special asset of the plan as is the cash account for receiving contributions, disbursing participant withdrawals, and processing transfers between plan investments.  If you go to the balance transfer/reallocation screen, I doubt "loan" comes up as an investment option of the plan for asset transfer -- just as "cash" is not an investment option.  Also, you can't transfer a loan note to another investment as there is no $$$ to transfer.  Even if you wanted to pay off the loan, you'd have to take a withdrawal of other investments to repay the loan -- you couldn't just transfer funds from investment to pay the loan.

However, since loan systems are usually integrated with the record keeping system, the repayments are deposited as withdrawn.  It would seem you'd have to refinance the loan to change the sourcing of the withdrawal and repayments to options available under the plan at the time of refinance. 

@Bill Presson Bill is it too late to get this question in for the "ask the experts" panel at ASPPA Annual?  

I wonder what kind of discussion we could get with a whole panel of "pension celebrities"...

Great idea!

On 9/12/2019 at 9:38 PM, RatherBeGolfing said:

@Bill Presson Bill is it too late to get this question in for the "ask the experts" panel at ASPPA Annual?  

I wonder what kind of discussion we could get with a whole panel of "pension celebrities"...

I'll see what I can do.

On 9/13/2019 at 6:25 AM, austin3515 said:

Great idea!

Austin, can you take the original question and modify it with whatever clarifying comments, etc that you think are appropriate and email it to me at bpresson@egps.com?

Thanks.

WCP

This is what I came up with to really isolate the crux of the question.  I dispensed with all the deemed loan stuff, and just stuck to a straightforward fact pattern that comes up all the time.

Question: Participant's 401(k) Elective Deferral account consists of $9,000 of a participant loan and $1,000 of Mutual Fund A.  Participant's Profit Sharing Account consists of $50,000 of Mutual Fund A (the Participant is already 100% vested in this account).  The Plan exclusively allows for hardship distributions from 401(k) Elective Deferrals. The Participant would be eligible for a $5,000 hardship distribution, except that the liquid balance in his 401(k) Elective Deferral account is just $1,000.  If the Employer/Plan's administrative policies surrounding participant investment direction allowed for it, would the Participant be permitted to elect the following transfer?

Thanks Austin. It will be in the Ask the Experts session at ASPPA Annual this year.

The winter virtual one?

28 minutes ago, austin3515 said:

The winter virtual one?

No, the in person meeting at the Gaylord National Harbor. The specific session is the last session of the conference on October 23rd from 10:15 to noon eastern.

OK, we'll all be waiting with baited breath to see what the response is! I won't be able to make it myself.