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Limiting Loans to Active Participants

Practice Management

Editor's Note: This is the seventh installment in a series concerning correcting plan loan failures. 

Q. May a plan's loan program be limited to active employees (i.e., does not allow a former employee that is a party-in-interest to request a loan)?  

A. A participant loan is a prohibited transaction unless it satisfies all of the statutory exemption requirements, including the requirement to make loans available on a reasonably equivalent basis. A loan program that excludes former employees violates this requirement. DOL Advisory Opinion 89-30. However, a plan may limit loans to former employee participants who are parties in interest. In the situation described, one violates the prohibited transaction exemption requirement and your loan program is a prohibited transaction. The plan needs to amend its loan program to comply with the exemption requirements.

Editor’s Note: This content is taken from “Loans: Correcting Taxation, Qualification and Fiduciary Failures,” an April 15, 2020 ASPPA Webinar presented by Stephen W. Forbes J.D., LL.M. of Forbes Retirement Plan Consulting. 

Opinions expressed are those of the author, and do not necessarily reflect the views of ASPPA or its members.