pension loan

Rapid response needed.

I have an employee who has requested a loan against his pension. I'm loath to advise our Trustees to approve the loan, as the employee has bragged that his recent back surgery only cost him $400 out of pocket. The employee has also informed me that he is going through a divorce and his soon-to-be ex wiped out his bank account. I feel he's actually requesting it due to a post-operative reduced income, considering our short term disability has a 60% benefit. To make matters worse, one of the Trustees feels the lack of income is reason enough to approve the loan, considering he wouldn't have had the reduced income if he hadn't had back surgery. It is my understanding from the IRS regulations that hardship pension loans can be only for an immediate and heavy financial need limited to medical expenses (plus a few hardships having to do with housing and tuition).

How do you separate out the underlying causes of a financial hardship? I mean, I could send my husband back to school without requesting a loan, but then two months later I realize that I now can't pay my cable bill. Can I request a loan under the assumption that if my husband wasn't in school, I could afford cable, so this loan is actually for his schooling, even though I won't be paying his tuition with the money?

And, if I'm uniformly advised not to allow the loan, then how do I tell the employee that his loan has been denied for lack of a legal purpose, after one of the Trustees told him it would be approved (this Trustee is my supervisor)?



  • 11 Comments sorted by Votes Date Added
  • First step, go to your plan documents.

    Most of them have some very restrictive language about what qualifies as a reason for the loan. Plan documents also usually restrict the frequency and the amount to be borrowed. Purchasing a house is a frequently approved purpose, catastrophic medical can also qualify, but these things should be spelled out in the plan.

    If it is your call and is discretionary, I would definitely make changes to the document to put it on a committee or better yet, a third party administrator.

    But if you are the decision maker and the plan docs don't give you enough guidance, then discuss it in detail with your supervisor. Share the information you have and let them make the call. Loans must be paid back and only the vested portion is available. After all, it will eventually be the EEs money anyway.
  • "After all, it will eventually be the EEs money anyway." I think this is the one Trustee's view who wants to approve the request. In his opinion, the request falls close enough to the restrictions and if the EE wants it, he should be able to get it.

    All loans must be approved by a three member Trust (3 highest in management, of which I am not). The plan document reflects the IRS/Treasury regulations in restrictions & limitations: "Loans shall be made available only in the event of hardship due to an immediate and heavy financial need. Immediate and heavy financial need shall be limited to (i) medical expenses described in Code Section 213(d) incurred by the Participant..." The Revenue Code (which actually applies to health spending accounts) defines medical care to include amounts paid for the diagnosis, cure, mitigation, treatment or prevention of disease, or for the purpose of affecting any structure or function of the body. There is no doubt the employee received qualifying medical care and therefore incurred medical cost. But $400 out of pocket medical cost is quite a bit less than the $2K he's asking for, which is what he claims he has lost in income since the surgery. The plan document does not explicitly provide for or deny replacement of income due to hardship... However, he wouldn't be needing to replace lost income if he hadn't had qualifying medical care. I guess I'm caught up in the details this verbose employee has provided. If he just came to me and said, "I need a loan because I don't have enough money after my surgery...", I wouldn't even think twice about recommending approval.

    Thanks for your prompt response, marc! I think I'm going to let the employee read the pertinent plan document section and let him decide whether to formally request the loan.
  • It is a good idea to have the EE review this section of the plan. Put a memo in the file to that affect.

    It is up to the three member committee.

    Let them review the info and decide. It is up to them to document their decision. By the way, their fiduciary liability is real, but in the end, all you can do is advise and let them pull the trigger.
  • I get nailed with fiduciary responsibility, too, as the defacto plan administrator...

  • Yep, same here.
    If he is "going through a divorce", could he be attempting to keep his soon to be ex from getting her fair share?
    Good luck,
  • Ooooh - hadn't even thought about that. Do I have to notify her that he's taking a loan? Does she have to sign the loan request? Oh-my-god - what now?!

    Geez, just when you think everything's going smoothly...
  • Abby: Let me jump in here and say that you are getting sideways about something that is not your responsibility to rule on anyway. You are a conduit in this process, and I have been that same conduit, as well as being a plan administrator and ultimate approver of loans in another situation. Just process the paperwork and move on to things HR. Grinding axes will only cause you to need a coctail. x:-)

    Disclaimer: This message is not intended to offend or attack. It is posted as personal opinion. If you find yourself offended or uncomfortable, email me and let me know why.
  • My understanding is if he isn't legally divorced, his spouse has to sign an acknowledgement that she is aware of the employee taking a loan.
  • It totally depends on the plan document. Some do, some don't. Read the summary plan description.

    Disclaimer: This message is not intended to offend or attack. It is posted as personal opinion. If you find yourself offended or uncomfortable, email me and let me know why.
  • Ok - I'm sorry to be so thick-headed, but can I assume that the question is about a loan from someone's 401(k) plan and not their pension plan? That heading sort of threw me because I've never heard of loans from pension plans.

    Re: 401(k) loans, our plan allows for any reason. We don't follow the hardship reasons established by IRS for withdrawals, which gets us out of the middle of evaluating need. As others have stated - let the trustees decide and stop making value judgements.

    Re: spouse signature on loan request - my experience has been that this is required and I'm surprised to read that Don's worked with plans that don't. I thought this was an IRS biggie, to protect the spouse because of the automatic rights a spouse has to at least 50% of the assets in these kinds of plans.
  • Actually, we have a Plan defined under 414(h), I believe, so it's not a 401(k), technically, but it is a plan for retirement (income deferral) and not a pension plan, per se. Money purchase plan, to be technical, again.

    We've recently rewritten the Plan document so that Hardship Withdrawals are the only acceptible reason for a loan.

    I think the spousal signature/acknowledgement question is addressed by each separate state, though I haven't yet found Missouri's take on it, and the retirement company hasn't informed me one way or the other of this possible obligation.
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