Requirements for a Participant Loan Program WIthin an I.R.C. Section 401(a) Plan

Abstract

Those employee benefit plans qualified under section 401(a) of the Internal Revenue Code, which may provide active participants with nonforfeitable accrued benefits, are permitted to include provisions allowing the participants to borrow funds from their own plan accounts.' In spite of the complexities of designing such a participant loan program and much being written on the subject, surprisingly little has been published approaching the subject from a comprehensive viewpoint. This thesis attempts to fill that void. Following the introduction, there is a brief review of the historical evolution of the legislation that governs the subject. Next is an analysis of the legal status of the parties to a participant loan transaction. This is an essential prerequisite to the discussion that follows on the various laws that directly and indirectly 'impact on the loan terms that can be offered. The discussion covers tax, labor, consumer protection and banking statutes and regulations at the Federal and State level. Those legal restrictions are then translated into the various features that may be incorporated into such a program and the provisions that must be included in the loan and plan documents. Finally, a number of problems are discussed with suggestions directed to both legislators and practitioners.