Chapter 8 Loan Processing If your plan allows participants to take loans against their vested plan account balances, then loan processing is a substantial part of your ongoing plan administrative process. Because loans from qualified retirement plans are governed by the same laws and regulations that govern the plans themselves, certain requirements must be met in order to assure that the plan remains in compliance with these restrictions. One important area of concern regards the possibility of significant tax consequences associated with defaulted participant loans. Thus, plan sponsors are required by law to provide participants with notification of the probable tax consequences for certain types of distributions, including those deemed to be due to defaulted loans. To help you manage this responsibility, Transamerica Retirement Solutions (TRS) offers an IRS Special Tax Notice for your use in case of a loan default. This Notice is included in your plan s Loan Application form that is available on the Web site by clicking on the Plan Administration > Forms links. You may process loans using paper forms or on-line, if your plan has elected the Paperless Loan feature. Plan Sponsor Responsibilities Regarding Loans It is the plan sponsor s responsibility to: Verify all completed and generated loan-related forms and any accompanying information provided by participants Have the forms signed and dated by an authorized plan representative Submit completed and approved Loan Application forms to TRS for processing, if your plan uses hard copy forms Have the plan s loan policy documented and available for distribution to participants requesting loans Set up the loan payment deductions in the payroll system, and insure that loan payments are deducted and submitted in a timely manner Keep all of the individuals loan documents on site in the participants employee files 1
8.1 Loan Processing: Hard Copy First, you need to verify that loans are allowed under your plan before you begin assisting participants with plan loan requests, so check your plan s loan provisions in your plan document. Also, contact SponsorConnect or access the Web site to insure that participants requested loan amounts are actually available to be borrowed. A loan processing fee and/or loan account maintenance fee may be charged for loans taken from your plan. Please refer to your Service Agreement for information and details on specific loan fees and charges. A Loan Application form can be found on the Web site under 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, loan fees may be charged to process a participant loan and maintain the participant s loan account. Completed forms can be mailed, faxed or emailed to: Mailing address: Transamerica Retirement Solutions 8488 Shepherd Farm Drive West Chester, OH 45069 Fax number: (877) 449-4443 Email: withdrawals@transamerica.com Once the Loan Application has been received by TRS, it is reviewed for completeness and eligibility. Once TRS has reviewed the Loan Application, the loan is processed if the Loan Application is in good order. The Payroll Deduction Authorization is mailed (or emailed if authorized) to the plan sponsor. It shows the amount of the repayments, when they are to begin, and how often they are to be remitted. The sponsor also receives a copy of the Promissory Note, Irrevocable Pledge and Assignment, and Truthin-Lending Disclosure Statement, Loan Certification and Amortization Schedule which should be kept in your company s employee files. You may wish to provide participants with copies of these documents for their records. The loan check is mailed to the plan sponsor under separate cover. The plan sponsor must also set up the loan payment deductions in the payroll system, and is responsible for deducting and submitting the loan repayments in a timely manner. 1
8.2 Loan Processing: Paperless Loans Paperless loans allow participants who meet your plan s loan eligibility requirements the ability to model and request loans on TRS s Interactive Voice Response system (IVR) or Web site. A per-participant loan processing fee and/or loan account maintenance fee may be charged for loans taken from your plan. Please refer to your Service Agreement for information and details on specific loan fees and charges. Do you want to add the Paperless Loan feature to your plan? Call SponsorConnect at (866) 498-4557 Restrictions on Using the Paperless Loans Feature The paperless loan option is not available for residential or hardship loans, or if your plan requires spousal consent to grant a participant a plan loan. Your plan must also be REA-exempt, which means that your plan cannot stipulate a joint and survivor (J&S) annuity as the normal form of benefit payment if you wish to elect the Paperless Loan feature. You may, however, amend your plan to remove the J&S annuity as the normal form of benefit payment and then be able to elect the Paperless Loan option. How Paperless Loans Work The participant models a loan for the desired amount and term of loan repayments via the IVR or the Web site. After modeling a loan model, the participant selects Request a Loan, and a disclosure appears. When the participant agrees to the terms of the disclosure, the loan is flagged for processing. TRS processes the loan within three business days of receiving the request. The loan documents listed below and the loan check are mailed to the plan sponsor (or emailed if authorized). Loan documents include: Promissory Note Irrevocable Pledge and Assignment Truth-in-Lending Disclosure Statement Amortization Schedule Loan Certification Payroll Deduction Authorization The plan sponsor must keep a copy of the loan documents provided for reference. The plan sponsor must also set up the loan payment deductions in the payroll system, and is responsible for deducting and submitting the loan repayments in accordance with the Amortization Schedule. 1
8.2 nnnnnnnnnnnnnnnnnnnnnnnnnnnnnnnnnnnnnnnnnnnnnnnnnnnnnnnnnnnnnnnnnnnnnnnnnnnnnnnnnnnnnn Loan nnnnnnnnnnnnnnnnnnnnnnnnnnnnnnnnnnnnnnnnnnnnnnnnnnnnnnnnnnnnnnnnnnnnnnnnnnnnnnnnnnnnn Processing: Paperless Loans (Cont.) The participant is responsible for communicating any errors or discrepancies to TRS as soon as possible. Participants can do so by calling TransDirect and speaking with a TRS Specialist. By endorsing and cashing the loan check, the participant is agreeing that he or she has received, read, and understood the terms and provisions of the Promissory Note, Irrevocable Pledge and Assignment, Payroll Deduction Authorization, Truth-in-Lending Disclosure Statement, Loan Certification and Amortization Schedule. To cancel a loan, a participant must notify TRS in writing. Written notification must include the participant s name, Social Security number, plan name and contract number. If the check has already been deposited or cashed, the loan cannot be cancelled. Loan cancellation notification correspondence should be mailed or faxed to: Mailing address: Transamerica Retirement Solutions 8488 Shepherd Farm Drive West Chester, OH 45069 Fax number: (877) 449-4443 The participant is responsible for communicating any loan-related errors or discrepancies to TRS as soon as possible. 2
8.3 Loan Policy: Terms and Use Plan sponsors are required to have the plan s loan policy documented and available for distribution to participants requesting loans. 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 limit is $50,000 or 50% of the participant s vested account balance, whichever is less. If the $ 50,000 limit applies, it 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 any loan balances on the date the loan is made. Loan Fees: A per-loan origination fee and/or an annual maintenance fee may be charged to cover the costs of application processing, loan set-up and/or annual payment processing, reconciliation and reporting. To verify your plan s loan fees, please refer to your Service Agreement. These amounts are deducted from the participant s account when TRS sets up the loan. Loan Term: Participants can choose to repay loans over a period of one to five years for general-purpose loans, or longer for residential loans. 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 due dates and amounts of the payments. Repayment through payroll deduction is the best way to avoid defaults on plan loans. If your plan allows loan repayments by terminated participants, the method of repayment for them 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.
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 of the loan s origination, 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. Interest paid on plan loans is generally not tax deductible. Since 2002, owneremployees who were previously prohibited from taking loans from qualified retirement plans are permitted to do so. Loan Balance: The loan balance is the outstanding principal amount owed on a participant s loan. 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 account balance, as the participant has already received the loan proceeds. Loan Default: An authorized plan representative must notify TRS that an outstanding participant loan is to be defaulted. 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 you alerting you that the loan is in default status. If loan repayments are still not received and TRS receives the authorized plan representative s direction to default the loan, it is defaulted in TRS s system and an IRS tax reporting Form 1099-R 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 treated as after-tax contributions, but not for purposes of compliance testing. Finally, a loan deemed to be defaulted does not relieve the participant of the responsibility to pay it off. A loan is in default and deemed to be a distribution when a payment is not received by the last day of the calendar quarter following the calendar quarter in which the loan payment is due.
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 his or her account is paid out, 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 the loan payoff 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. Loan Payoffs and Repayment Restrictions: A loan payoff can be made at any time. Partial repayments are not allowed. Personal checks from participants are not accepted. The preferred way for a participant to pay off a loan is by a check from the participant made out to the company or to TRS. If the participant makes out the check to the company, the company can either make out its own check to TRS, or include the participant s loan payoff amount in the next contribution data file upload once the participant s check has cleared his or her account. If the participant is going to pay off the loan directly to TRS, it must be with a certified check. Please be sure that loan payoff checks include the participant s name, Social Security number, and loan number. Company checks or participants certified checks should be made payable to Transamerica Retirement Solutions and mailed to: Transamerica Retirement Solutions 8488 Shepherd Farm Drive West Chester, OH 45069 Loan payoffs can be made at any time, but partial repayments are not allowed.
8.3 Loan Policy: Terms and Use (Cont.) Multiple Loans: A qualified retirement plan may limit the number of loans a participant can have outstanding at any given time. If your plan allows for only one outstanding loan, then the current loan must be paid off before another loan can be taken. Truth-in-lending Compliance: Qualified retirement plans allowing loans generally must comply with the Federal Reserve Board s truth-in-lending requirements. Regulation Z applies to individuals who extend credit more than 25 times a year, if the credit is subject to a finance charge or payable by written agreement in more than four installments.
8.4 Loan Reports You can find, run, download and/or print the following loan-related reports on the www.ta-retirement.com site. Click on the Plan Reports > Loan links to access them: Loan Balance: Lists participants with current loan balances Loans Issued: Shows participants granted loans and information on the loans within a date range you specify Loan Payment History: Details a particular participant s loan payments over a date range you specify Loans Paid Off: Lists all participants who paid off plan loans within a date range you specify Loan Register: List of all participants loans detailing the activity for the life of the loan. Only participants with a loan balance as of the end of the plan year are listed on this report. 1