Defined Benefit Plan – Loans
Can a defined benefit plan loan out money to one of the participants, even if there is a formal loan document at a reasonable interest rate?
Can a defined benefit plan loan out money to one of the participants, even if there is a formal loan document at a reasonable interest rate?
Permalink Submitted by Alan Spross on Wed, 2011-02-16 21:19
Yes, but the following is copied from the IRS site for “top 10 issues for DB plans” from plan audits:
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4. Prohibited Transactions
Loans are being made out of plans that don’t provide for them. In addition, loans are being made to people considered to be disqualified under IRC 4975. A specific trouble area relates to loans being made to HCEs that violate one or more of the exemptions listed under 4975(d). There are also 72(p) violations due to the original excessive length and/or amount of the loan exceeding either 72(p) or plan requirements. IRC 72(p) violations are also being found in relation to the failure to meet the level amortization requirements which require that payments be made at least quarterly.
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A DB plan CAN provide for loans, but is fully subject to sec 72p as stated above, just as a DC plan would be. The plan document must include the proper provisions.
Permalink Submitted by mk foss on Wed, 2011-02-16 21:33
Another consideratin with a plan loan is that spousal consent is required if the loan exceeds $5,000 because a DB plan is the type that would require spousal consent for a beneficiary choice other than the spouse.