(b)lines Ask the Experts – Should You Have a Loan Policy Document?

Michael A. Webb, Vice President, Retirement Plan Services, Cammack LaRhette Consulting, answers:  

The Experts believe you are right on track! Though, like an Investment Policy Statement, there is not Code or ERISA requirement to establish a Loan Policy Document, or LPD, maintaining a written policy will greatly assist with the administration of plan loans and decrease to possibility of errors involving loans. Thus, many plan sponsors who permit loans in their plans are adopting LPDs as best practice.   

A good Loan Policy should address the following areas:  

• How many loans may be outstanding at any one time for a individual participant (the lower this number, the greater the ease of administration); 
• Method of loan repayment (e.g. payroll deduction, coupon and/or ACH debit); 
• Frequency of loan repayment; 
• Whether or not terminated employees can initiate plan loans; 
• What happens to an existing loan when an employee terminates employment (e.g., is there an immediate account offset, or can the participant continue repayments); 
• What happens in the event of loan default (though this is statutory—new loans may be permitted ONLY by payroll deduction or, use of outside collateral, the latter of which is rare—if, for example, the plan does not permit payroll deduction repayment in the first place, it is a good idea to explicitly state that no new loans are permitted in the event of default); and 
• The precise maximum term of a primary residence loans (which can vary as permitted by statute; terms of non-primary residence loans may not exceed five years). 

Also, if the plan utilizes multiple vendors, any provisions that vary by vendor can be incorporated into the LPD as well. The LPD can also refer to vendor contracts for items such as fees, interest, and where repayments are invested, as these provisions may vary between different contracts, even those issued by the same vendor.   

The LPD should also be incorporated into the plan document by reference; alternatively, loan provisions could be explicitly stated in the plan document itself. However, such provisions are often subject to frequent modification, which would require plan amendments to be adopted for each occurrence. This is the primary reason why many plan sponsors opt for a separate LPD rather than expressly stating such provisions in the plan.    

Thank you for your question!   

As a reminder, this column does not exist without reader questions, so please keep those questions coming by simply e-mailing them to rmoore@assetinternational.com.    

NOTE: This feature is to provide general information only, does not constitute legal advice, and cannot be used or substituted for legal or tax advice.