RPF M4 U1 Rules that Govern Participant Loans Flashcards
Study
What is a participant loan?
A loan from a retirement plan that operates similarly to a loan from a financial institution, where the participant receives the loan amount and must repay it according to an amortization schedule.
What must be documented in a loan program?
The loan program must specify the loan program administrator, application procedures, related expenses, basis for approval/denial, loan limits, interest rate procedures, type of security, repayment procedures, suspension procedures, and loan default information.
What are the eligibility criteria for a loan?
Eligibility is determined by whether the participant is actively employed, has any outstanding loans, and the amount of their vested account balance.
What is the maximum repayment period for personal loans?
The regulatory maximum duration for a personal loan is 5 years, while home mortgage loans can extend beyond five years.
What is the maturity date?
The date by which the final payment of the loan is due.
What is amortization?
The distribution of loan repayments over the term of a loan.
What does the law require regarding loan defaults?
The loan program must specify events that cause default and procedures for loans in default.
What is the interest rate requirement for loans?
The loan must bear a reasonable interest rate consistent with rates charged by lenders for similar loans.
What must a loan program include regarding spousal consent?
Some plans require spousal consent in writing, obtained not more than 90 days prior to the loan, acknowledging the effect of the loan.
What happens if a loan is not repaid in a timely manner?
The unpaid portion is treated as a distribution from the plan for tax purposes.
What are the Department of Labor’s requirements for loans?
Loans must be available to all participants on a reasonably equivalent basis, not discriminate in favor of highly compensated employees, be made according to documented plan provisions, be adequately secured, and bear a reasonable rate of interest.
What is the principal amount in a loan?
The amount borrowed.
What is the definition of interest in the context of loans?
The cost of borrowing money; it is the excess repaid over the principal amount borrowed.
What is the process for loan repayment?
Repayments are typically made through payroll deduction or ACH, and the repayment period is determined by payroll frequency.
What is a hardship loan?
A loan that may require a participant to meet specified hardship criteria to be eligible, with the amount limited to what is needed to prevent the hardship.
What must be disclosed in the summary plan description?
Certain information about the loan program must be disclosed, including loan provisions and eligibility criteria.
What are the main factors to consider when determining loan eligibility?
- Is the participant actively employed? 2. Does the participant have any outstanding loans? 3. What is the amount of the participant’s vested account balance?
What does the loan program dictate regarding eligibility?
The loan program may dictate that loans are only for actively employed participants, that participants may have no more than one outstanding loan at one time, and that a loan must be for a minimum of $1,000.
Would Amy be approved for a loan based on her situation?
No, Amy would not be approved for the loan because she already has an open loan.
What is a deferred distribution?
A deferred distribution occurs when an employee terminates employment but leaves his or her assets in the former employer’s plan rather than taking a distribution or rolling the funds to another plan.
Would Sheldon be approved for a loan based on his situation?
Yes, Sheldon would be approved for a loan because the plan allows for two open loans.
What restrictions are generally placed on loan amounts?
Participants are generally restricted from taking more than 50% of their vested account balance.
How much could Derek borrow if he were to take a loan?
Derek would not be able to take a loan because his vested balance is $900, and the minimum loan amount is $500.
What must employers specify when setting up a participant loan program?
Employers must specify provisions such as the loan administrator, application approval process, interest rate determination, and restrictions on loans.
