PLANSPONSOR - October/November 2018 - 57

participant and the plan sponsor to make
sure loan payments come out of payroll and
that the status of each loan gets correctly
reported to the recordkeeper.
Getting a monthly report of loans
PUTTING LOAN
POLICIES IN WRITING
that are delinquent but not yet in default
is key. A loan becomes delinquent when
payments are late; after a certain length of
time, it will be declared defaulted. Zaklad
says, " Make sure participants are notified
that payments have not been made-and
that your notification is clear. For instance:
'If payment is not made by X date, you will
have to pay taxes on the loan, because once
a loan is in default your only recourse will
be to work with the IRS; this is a timeconsuming
process.' "
Zito recommends that plan sponsors
keep permitted participant loans to one. " It
avoids a refinancing loop. If a plan sponsor
allows two or more, a participant may take
out a second, larger loan to pay off the
first. Then he can do that again and again
until he hits the loan maximum. This is a
common issue with plans that offer more
than one loan at a time, " he says.
In addition, he says, plan sponsors
should ensure that the reporting process
is " tight " for new loans coming into
the payroll system. Make sure there is a
A
ndrew Zito, with LAMCO Advisory Services, has never seen a loan in excess
of the maximum limit. " Most recordkeepers have safeguards against that, "
he says. " Even before the loan is originated, it is stopped, as the plan's loans are
governed by the loan policy document. "
As with many areas of plan administration, putting policies in writing can
be a best practice. According to Zito, plans that have loans should have a loan
policy document separate from the plan document. Not all plan sponsors know
about this separate document and that it is responsible for governing loans. It
should contain all necessary parameters as to how the loan should be administered-for
example, the maximum number of loans a participant may take at
one time and the interest rate set on plan loans. " The recordkeeping systems are
set up to handle whatever the loan policy states, " Zito says.
Rosie Zaklad, who has seen loans exceed the limit, says a loan policy statement
sets forth a DC loan's statutory requirements. She also likes to see these
policies in a separate document, so it can be distributed separately and be easily
accessible to participants. In addition, the document can be part of the sponsor's
summary plan description (SPD).
It is important to set the rules through an actual loan policy, " rather than
flying by the seat of your pants with a loan provision, " says Jinnie Olson, of
Milliman. If a plan sponsor puts a rule in the policy, that makes it definite-and
the policy can be published and given to participants. With a loan policy statement,
there are no gray areas; it states the rules. -JFH
double-check in place so all new loans are being captured.
" Recordkeepers generally provide a loan status report that
tells them when loans are paid and when the last payment was
made, " Zito says. " Sponsors need to run down the list, and if the
last payment date isn't the date of your last payroll, why did that
loan not have a payment? You can work your way backward from
there. There is nothing automatic about this process because of
the intricacies of these loans. But if this process is used, sponsors
can save themselves a great amount of time and aggravation. "
Zaklad has confronted situations where a plan document
provided for only a 60- or 90-day cure period, not the maximum
allowable period under Treasury Regulations-i.e., the IRS's
formal interpretation of the Internal Revenue Code-which is
the end of the calendar quarter following the one in which the
missed installment payment was due. Having a shorter cure
period tends to result in more loans reported as deemed distributions
because less time is available to catch and make up missed
payments, says Zaklad.
She recommends that plan sponsors check their plan document
and confirm it provides for the maximum allowable cure
period. " If a plan does provide for a shorter cure period-e.g., 60
or 90 days-the plan sponsor should confirm that the shorter
cure period is being enforced and should consider amending its
plan document to provide for the maximum cure period. "
Olson says, in general, at the plans Milliman works with,
plan sponsors offer one or two loans maximum but with the
option of refinancing. " With a refinancing policy, if a person has
one outstanding loan, he can add on additional money as long as
he stays within the statutory limit, which is five years for paying
it off. He just increases the amount of money he received from
the original loan. " Many sponsors prefer not to modify payroll to
change the payment amount, she says. " It's a little difficult, but
some plan sponsors do like to do this because they can monitor
and maintain just one loan per participant while still letting
these individuals access their money if they must. "
Typically, a recordkeeper will charge a small fee for this, and
it will be similar to taking a new loan. Different, though, is that
the plan sponsor is taking the existing loan and pushing it to a
secondary loan.
If a plan has a loan program, Zito stresses, it needs to be
monitored. " Make sure participants understand the implications
of taking a loan. And make sure your payroll employees understand
the impact of not making a loan payment. "
To conclude, Olson says, remember that a plan sponsor is
not required to have a loan provision within a DC plan. " It's a
benefit you are offering your participants. " -Judy Faust Hartnett
PLANSPONSOR.com October-November 2018 57
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