Advanced Participant Loan Issues
ASPPA News from the Field
2012 ASPPA Annual Conference
WASHINGTON (October 30, 2012)—Despite enduring the effects of Hurricane Sandy and missing some participants due to the storm, the 2012 ASPPA Annual Conference successfully settled back into its agenda. Workshop session 46, on Advanced Participant Loan Issues, was expertly handled by Robert M. Kaplan, CPC, QPA of ING even though his co-presenter, Stephen W. Forbes, Esq., of SunGard, was unable to make it into the conference due to the havoc wreaked by the hurricane.
Because of turbulent economic times, more participants are taking loans from their plans and this session was designed to discuss the many problems that pension plan administrators face while administering them. Based on a study of 100,000 employees, 80% of terminating employees with loans defaulted when they took their benefit distributions. The average defaulter had larger loan balances than those who repaid at termination, and those with multiple loans were more likely to default than participants with a single loan. Many administrators are struggling as they try to help their clients meet their participants’ needs, while simultaneously ensuring that plans remain compliant with statutory loan rules.
Administrators’ primary concerns are making sure that loans are neither considered taxable nor considered prohibited transactions under either the Internal Revenue Code or ERISA. The workshop session covered loan document requirements, including plan document provisions, the loan policy, the loan note and the irrevocable pledge and assignment. The speaker discussed the sticky issue of the payment starting date, which for most loans must be arranged to ensure that the loan does not exceed five years. For this requirement, Kaplan suggested that loans be set up for 58 or 59 monthly payments, instead of 60 just to guarantee that the five-year limit is not exceeded.
Other areas covered included loan default reporting issues (which can be especially confusing when a defaulted loan cannot be distributed to the participant), how to handle the basis that is created with a deemed distribution, dealing with phantom interest, loan offsets and the mandatory income tax withholding rules.
Loan refinancing continues to be one of the most difficult problems that administrators have to handle. Therefore, Kaplan emphasized the importance of including refinancing details in the loan policy, as well as limiting the number of loans a participant may have at a time.
The session also covered when plans may suspend loan payments for leaves of absence and special rules for military leaves of absence.
Setting interest rates for loans continues to be a very controversial issue. Plan loans must carry a commercially reasonable interest rate, but what does that mean in practice? How does a plan administrator determine what a financial institution would charge for a similar loan? The IRS has addressed this issue at various conferences, but their message has been confusing. Is “prime plus one” a reasonable rate? There is no safe harbor and what might be reasonable to an IRS auditor may not be reasonable to the DOL. Stay tuned for more discussions of this particular issue.
Karen Jordan, CPC, QPA, QKA, ERPA
President | Alaska Pension Services, Ltd.
Past President ASPPA 1997-1998
ASPPA member since 1983
Category: Member Focus
