Chapter 8 Loan Processing Overview

Transcription

1 Chapter 8 Loan Processing Overview If your plan allows for loans, your participants will want to borrow from their retirement plan accounts from time to time. Certain requirements must be met. Since there may be significant tax consequences associated with defaulted participant loans, you are required by law to provide participants with notification about the probable tax consequences for certain types of distributions, including loans that have been deemed to be defaulted. To help you manage this responsibility, TRS has prepared an IRS Special Tax Notice for your use in case of a loan default. You may process loans via hard copy or on-line, if your plan has elected to add the on-line feature, called Paperless Loans. Plan Sponsor Responsibilities Regarding Loans It is the plan sponsor s responsibility to verify the information provided by the participant, then sign and date the form authorizing the loan. Do you want to add the Paperless Loan feature to your plan? Call TRSConnect at (800)

2 8.1 Loan Processing Hard Copy A processing fee may be charged, so please refer to your Service Agreement for specific fees and charges. Loan forms can be found by following these steps: 1. Point your Web browser to 2. Enter your username and password to log in 3. On the left side of the page, select Plan Administration 4. Near the center of the page, select Participant Forms 5. Choose Loan Application from the list of forms A completed Loan Application form, signed and dated by an authorized plan representative, is required in order for TRS to process a participant loan. Also, as a reminder, a loan fee may be charged to process a participant loan. Once the loan application has been received at TRS, the Loan Application will be reviewed for completeness and eligibility. When TRS has completed the review of the loan request, the check and the promissory note will be mailed to the plan sponsor for acceptance of the loan terms. Mailing address: Transamerica 100 G Executive Drive Edgewood, NY The loan check and Promissory Note are mailed to the plan sponsor for the participant s signature indicating acceptance of the loan s terms. Fax number: (631) The plan sponsor may release the loan check to the participant upon receipt of the signed Promissory Note from the participant.

3 8.2 Loan Processing Paperless Loans Paperless loans are designed to allow eligible employees the opportunity to model and request loans through an automated Voice Response System (VRS) or the Web site. Paperless loans are not available for residential or hardship loans, or where spousal consent is required. A plan must be REA exempt in order to elect the Paperless Loans feature. Plans having the normal form of benefit payment as a Joint and Survivor (J&S) Annuity will not have access to paperless loans unless they are amended to remove the J&S Annuity requirement. This requirement eliminates all defined benefit and money purchase pension plans, as well as any profit-sharing plan with assets transferred from a defined benefit or money purchase plan. How Paperless Loans Work The participant will model a loan with the desired amount and length of loan repayments via the VRS or the Web site. Once the participant selects Request a Loan, a disclosure will appear and when the participant agrees, the loan will go into processing. The loan paperwork and check will be sent to the plan sponsor. Do you want to add the Paperless Loan feature to your plan? Call TRSConnect SM at (800) Transamerica processes the loan request on the next business day, if requested prior to 4:00 p.m. E.T., or on the second business day, if after 4:00 p.m. E.T. A check will be generated within two days after the loan is processed. Transamerica will mail the loan paperwork (the Loan Note and Security Agreement, Amortization Schedule and Withdrawal Confirmation) and the loan check to the plan sponsor. The plan sponsor presents the loan paperwork and the check to the participant upon receipt, and must keep a copy of the signed Loan Note and Security Agreement. The plan sponsor must set up the loan payment deduction amount in payroll and is responsible for processing the loan repayments in a timely manner.

4 8.2 Loan Processing Paperless Loans (Cont.) The participant is responsible for communicating any errors or discrepancies in a timely manner by calling TransDirect to speak with a Plan Specialist. By endorsing and cashing the check, the participant agrees to the fact that they have received, read, and understood the terms and provisions of the Loan Note and Security Agreement and the Amortization Schedule. To cancel a loan, the participant must notify Transamerica in writing. Written notification must include name, Social Security number, plan name and contract number. If the check has been deposited or cashed, the loan cannot be cancelled. Notification should be mailed or faxed to: Mailing address: Transamerica 100 G Executive Drive Edgewood, NY Fax number: (631)

5 8.3 Loan Policy Terms and Use Plan sponsors are required to have the plan s loan policy documented and available for access by participants. The following definitions and explanations are intended to help you understand the guidelines, procedures and terms used in processing participant loans. Minimum Loan Amount: Refer to your plan document for the actual minimum loan amount allowed under your plan. Maximum Loan Amount: By law, this is $50,000 or 50% of the participant s vested account balance, whichever is less. The $50,000 maximum loan amount is reduced by the sum of the participant's highest outstanding loan balances during the 12-month period ending on the day prior to the date the loan is made, net of the loan balance on the date the loan is made. Application/Processing Fee: A one-time $50.00 fee per loan is charged for application processing. You can verify this amount in your Service Agreement. This amount is deducted from the loan amount paid to the participant or can be charged to the employer. See your Summary Plan Description (SPD) to determine who pays the fees for your plan. Annual Loan Account Fee: An annual $50.00 loan account fee for each outstanding participant loan is also charged either to the employer or the participant. You can verify this amount in your Service Agreement. Refer to your SPD to see which option applies to your plan. Loan Term: Participants can elect to pay loans back over a period of one to five years for general-purpose loans, or longer for a loan taken to purchase or build a principal residence. Funding Procedure: Loans are funded in accordance with the participant s elections noted on the Loan Application form. If no elections are indicated, they are funded on a prorated basis from each investment fund in a participant's account. Repayment: Loan payments are due each pay period through payroll deduction. The payments must be remitted to TRS in the same frequency as are the participants elective contributions, if applicable, but not less frequently than quarterly. The payroll frequency can be weekly, biweekly, semimonthly or monthly. The participant s Loan Amortization Schedule reflects the same periodicity as your payroll submissions, and contains the dates and amounts of the payments. Repayment through payroll deduction is the best way to avoid defaults on plan loans. Loan repayments are not considered to be pretax contributions, so are deemed to be made on an after-tax basis. A terminated participant cannot remit repayments directly to TRS. If your plan allows loan repayment by a terminated participant, the method of repayment for him or her is to write a check to the employer for each repayment. The plan sponsor then remits the loan repayment to TRS with the regular payroll loan repayments and contributions. A terminated participant cannot remit loan repayments directly to TRS. Personal loan repayment checks from participants are returned, and the payment is not credited against the loan.

6 8.3 Loan Policy Terms and Use (Cont.) Interest Rate: A loan s interest rate is fixed for the life of the loan, and each payment s interest amount is credited only to the borrowing participant s account. The interest rate, which is determined by the plan s trustees, must be a reasonable rate of interest like those charged by persons in the business of making loans under similar circumstances. For example, the plan s interest rate could be the Prime Rate published in the Wall Street Journal on the first business day of the month in which the loan originates, plus 1%. The interest rate determined by the trustees is required to be shown on each Loan Application form. The method for determining the interest rate must be applied consistently to all participant loan requests. Loan Balance: The loan balance is the outstanding principal amount owed on a participant s loan. This amount is a component of the participant s total loan balance. These amounts will be equal for plans allowing only one loan outstanding at any time, but will differ for plans allowing multiple loans. If a participant with an outstanding loan balance terminates employment and requests a distribution from the plan, the loan balance is deducted from his or her total plan balance, as the participant has already received the loan proceeds. Loan Default: A loan default, which is a deemed distribution, occurs when a participant or beneficiary fails to make a payment by the last day of the calendar quarter following the calendar quarter in which the loan payment is due. A default also occurs if a participant on a leave of absence lasting over 12 months fails to make a loan payment by the earlier of either the due date following the suspension period or the due date of the last payment. If TRS does not receive a loan repayment on an outstanding loan for 90 days, a letter is sent to the plan sponsor alerting him or her that the loan is in default. If loan repayments are still not received and TRS receives no response from the plan sponsor, the loan is defaulted, and an IRS tax reporting Form 1099 is issued for the unpaid balance in that tax year. Once a loan is deemed distributed, the interest accruing on it thereafter is not included in the participant s taxable income. Any repayments received after the loan is defaulted are returned to the sender. For purposes of calculating the maximum permitted amount of any subsequent loan, a loan that has been deemed distributed is considered outstanding until that loan obligation has been satisfied. Since 2002, owneremployees who were previously prohibited from taking loans from qualified retirement plans are permitted to do so. A loan is in default when a payment is not made by its due date. In the event payment is not received by the last day of the calendar quarter following the calendar quarter in which the loan payment is due, a distribution is deemed to occur.

7 8.3 Loan Policy Terms and Use (Cont.) Outstanding Loan on Participant Termination: If a participant with an outstanding loan terminates employment for any reason and elects to take a distribution of his or her entire plan balance, the participant must either pay off the loan or the account balance in the plan is offset, or reduced, by the amount of the outstanding loan balance at termination. The amount of the loan offset is treated as a distribution to the participant at the time of distribution and is taxed unless the participant rolls over an amount equal to the amount of the loan offset to another employer s qualified retirement plan or an IRA within 60 days of the date of the distribution. The 20% mandatory income tax withholding levied on distributions not rolled over is based on the participant s total vested account balance, including the amount of the loan offset. If the participant does not elect to receive his or her entire account balance, the loan can remain in force as long as the participant continues to make payments on it when due, if the plan allows terminated participants to continue to pay off plan loans. Leave of Absence: Participants loan repayments may be suspended during a period of authorized, unpaid leave of absence up to a maximum of 12 months, provided that the leave of absence commences at least 12 months before the final loan payment is due. The term of the loan is not extended due to a leave of absence. At the end of the 12-month suspension period, or, if earlier, the date repayments recommence, the payment amount is recalculated so that repayment is completed by the end of the original loan term. The plan sponsor must notify TRS in writing of any participant with an active loan who will be absent from work on an approved, unpaid leave.

8 8.3 Loan Policy Terms and Use (Cont.) Loan Payoffs and Repayment Restrictions: A loan payoff can be made at any time. Partial repayments are not allowed. The preferred way for a participant to pay off a loan is by a certified check from the participant or plan sponsor. Personal checks from participants are not accepted. Please be sure that loan payoff checks include the participant s name, Social Security number, and loan number. The check should be made payable to Transamerica Retirement Solutions and mailed to: For plans based outside New York state: TRANSAMERICA LIFE INSURANCE COMPANY P.O. Box New York, NY For plans based in New York state: TRANSAMERICA FINANCIAL LIFE INSURANCE CO P.O. Box New York, NY The loan payoff paperwork should be sent to: Transamerica Retirement Solutions 100 G Executive Drive Edgewood, NY