Having more 457(b) or 401(a) plans than you really need can create administrative headaches, cost participants unnecessary fees, and sometimes result in “excessive” participant loan situations.
If an employee participates in a 457(b) or 401(a) plan, it is likely that he or she can request a participant loan, or loans, according to the terms of the plan. If that employee participates in more than one 457(b) or 401(a) plan simultaneously, and each of those plans allow participant loans, it is possible for the employee to take out 2, 3 or perhaps 4 loans, depending on what each plan’s loan provisions allow. This is particularly true if participants can “request” loans online, directly from the recordkeeper.
The potential for excessive participant loans arises because there is a “single” set of loan limits that apply to all participant loans taken by any one participant. However, because in many “multiple plan – multiple vendor” situations there is no one monitoring or policing these limits across all of the plans, the per participant loan limits often are violated.
The rules governing the issuance and repayment of participant loans are fairly extensive and complex (see, https://www.irs.gov/retirement-plans/deemed-distributions-participant-loans). Given the overall limits on all participant loans to a single participant (generally, the lesser of $50,000 or 50% of the participant’s vested account balance), and the requirements for maximum loan terms (generally 5 years) and repayment terms (generally, level amortization at least quarterly), one begins to see how complicated it might be to review the issuance of multiple loans from various plans to make sure that they do not, taken together, violate these rules. For example, for purposes of both the $50,000 limit and 5-year limit, someone needs to make sure that subsequent loans are not used to “get around” these limits. If the limits are violated, some or all of the affected loans may become taxable.
This post doesn’t attempt to explain how all of the participant loan rules might apply within the context of governmental 457(b) or 401(a) plans. It is intended to warn cities and special districts that continue to maintain multiple plans that employees can participate in and borrow from on a simultaneous basis. The situation is not unlike having a single overall credit card borrowing limit, multiple credit card issuers, and no one keeping track of whether the overall limit has been exceeded. Of course, there are always solutions to these problems.
Jeff Chang is a partner at Best Best & Krieger LLP. He has four decades of experience skillfully evaluating benefit and retirement plan compliance to achieve maximum outcomes for public agency clients throughout California. He can be reached at jeff.chang@bbklaw.com or (916) 329-3685.
