HomeMy WebLinkAboutRes 2014-78 - Define Contribution 457 Plan401/457 PLAN
LOAN PROGRAM IMPLEM NTATION
PACKET FOR EMPLOYERS
icMA-RC
Building Retirement Security
This packet includes:
• A Guide to Implementing a Loan Program
• Loan Guidelines Agreement for a Retirement Plan
• Suggested Resolution for a Legislative Body Relating to
Amending a Retirement Plan to Permit Loans
• Loan Administration Agreement for Section 457 Deferred
Compensation Plans
• Amendment to Adoption Agreement for Section 401 Plans
CITY COIINCILACTION
APPROVF:D � DF.NiED
REC IVED OTHER���'T—'-.
p�. Nc�
CITY OF PALM DESER�F,F,TING DATE -� �� !`.�
YES•��or�,v� �rn�_ ! v hEt�'E����
NOES: NOn� -
FINANCE DEPARTMENTAIisENT: ��ie
ARSTAIN:_� ---------
Staff Report VERIFIED BY:.�— Z��
Original on File with City Cterk's Office
REQUEST: CONSIDERATION OF RESOLUTION NO. 2014- 78 TO ALLOW
LOANS FROM EMPLOYEES 457 DEFERRED COMPENSATION
CONTRIBUTION ACCOUNTS WITH ICMA-RC.
SUBMITTED BY: Paul S. Gibson, Director of Finance
DATE: September 11, 2014
CONTENTS: Proposed City of Palm Desert Resolution No. 2014- 78
Loan Program Guidelines Agreement with ICMA-RC
Recommendation
By Minute motion, adopt Resolution No. 2014- 78 to allow loans from employee 457 Deferred
Compensation contribution accounts with ICMA-RC and authorized Finance Director to sign
Loan Guidelines Agreement.
Backqround
Palm Desert City Council adopted Resolution No. 85-115, established the ICMA Retirement
Corporation (ICMA-RC) deferred compensation plan on October 24, 1985. This allows
employees to set-aside wages into employee trust account under IRS code section 457. We
currently have 55 employees that have a 457 trust account with around $7,145,000.
Several employees requested that the City consider allowing loans from their trust accounts up
to $50,000 for purpose of a house loan or emergency financial hardships. Loans could not
exceed 50% of their trust account and would accrue interest in their account of prime plus 0.5%
for up to 10 years. All loans are due and payable when employee retires and starts collecting
from their account. ICMA-RC would deal with setting up the loans with the employees and
would require them to make payments directly with them using ACH debit transfer from their
bank account. ICMA-RC will charge the employee for the cost of servicing the loan.
Fiscal Analvsis
City would not be a participant in this process other than receiving notice of loan being approved
and taken out of employee trust account.
Sub ' d by:
r
aul S. Gibson, Director of Finance hn M. Wohlmuth, City Manager
RESOLUTION NO. 2014- 78
A RESOLUTION OF THE CITY COUNCIL OF THE CITY OF PALM DESERT,
CALIFORNIA, AMENDING EXISTING DEFINED CONTRIBUTION 457 PLAN
WITH ICMA RETIREMENT CORPATION TRUST AGREEMENT
WHEREAS, the City of Palm Desert has employees rendering valuable services; and
WHEREAS, the City of Palm Desert first adopted its deferred compensation in 1985
administered by the ICMA Retirement Corporation Employer Plan Number 30-2129; and
WHEREAS, over the years the plan has been amended to reflect changes in Federal
law and the City's benefits structure; and
WHEREAS, the City of Palm Desert will permit loans under the plan as provided '+n
Article XIII of the Adoption Agreement and in the executed Loan Guidelines Agreement.
NOW, THEREFORE, BE IT RESOLVED that the City Council of the City of Palm Desert,
California approve the attached Loan Guidelines agreement; and
PASSED, APPROVED AND ADOPTED at the regular meeting of the Palm Desert City
Council, held on this 11th day of September, 2014, by the following vote to wit:
AYES:
NOES:
ABSENT:
ABSTAIN:
VAN TANNER, MAYOR
RACHELLE D. KLASSEN, CITY CLERK
CITY OF PALM DESERT, CALIFORNIA
LOAN ADM
INISTRATI�N AGREEMENT
FO
R SECTION 457 DEFERRED
COMPENSATION PLANS
Loun Guid�li�us Agrmnrnt
Name of Plan(please state the EmQloyei's oompkte name,indading state): C i t y o f P a lm D e s e r t, C a 1 i f.
Plan Typa Q 401{a) Money Purchue Plan �401 Pro6t-Shuing Plan �457 Deferred Compensarion Plan
ICMA RC Plaa Namber: �� Z-I 2��
1. Purpose
The purpose of these guidelines is to establish the terms and conditions under which the Employer will grant loans to participants.Zhis is
the only o�icial Loan Provision Document of the above named Plan.
11. Eiigibilily
Loans are available to all active employees.Loans will not be granted co partidpants who have an existing loan in deCaulc.
Loans will be pro-rated among all the funds in w6ich the partiupant is invested at the time the loan is made.
For 401 plons odr•
Loans are avail�ble from the following sources: [select one or bot6J
� Employer Contribudon Account(vested balances only)
� Participant Convibution Accounts{pre-and post-tax,if applicable,including Ernployee Mandatory,Employee Voluntary,
Employer Rollover,and Portable Bene6ts Accounts,but excluding the Deductible Employee Contribution/Quali6ed Volun-
tary Employee Contribution Account)
Fa Rodi�Ol(kl lla�a�:
A participant's Dcsignated Roth Aocount balance can be used to secure a participant loan.
Designaced Roch Acoounc balances Iselecc one]
� wil!not(default opdon)be avail�bte as a source for loans under the Plan.
Q will be aw�ilabk as a soarce for loans under the Plan. (Nota lJsing t6e Ratfi soa�s�e fv�baas may ha�e ne�ati�e tu aon�e-
quenoa fur p�rbcipants.)
fot al Plm typGc
IN. Loan Purpose
Loans are available for the following purposes and miut be requesced in the comesponding mahod(select one):
� �P��
Online aad I.oaas by G�ll Center:All loans must be requesced either online by employees through ICMA-RC's Account
Access site at www ictnarc.org or direct}y over the phone witli an Investor Services associate(via the Loans by Call Center
service),both of which require preauthorization by the Employer as outlined in italics under Section IV.Application Process.
� �'P�7�
Loans shall only be granted in the event of a participant's hardship or for the purpose of enabling a partiapant to meet
certain specified financial situations.'Ihe employ+er shall approve che participant's loan application after determining,based
on all celevant facts and circumstances,that the amount of the loan is not in eucess of the amount required to relieve the fi-
nancial need.For this purpose,financial need sh�ll indude,but not be limited to:unreimbursed mediral ezpenses of rhe par-
3
ICMA- RC
dcipant or members of the participant's immediate family,establishing or substantially rehabilitating the principal residence
of che partidpanc,or paying for a college education{including graduate studies)for the paraidpant or hisl6er dependents.
(Iyota Online or I.oana hy Gll Ceam not applic.able wit�t6is optioti.P�rticipant mast oompltte the ioan appliauion
fior emP�aPP�'�)
IV. Applica�an Pnooess
If an employee is mamed at the time of�e application and your plan hzs elected the Qualified joint and Survivor
Annuity Option,spousal consent is required for the loan.The employee's spouse must consent,in writing,to the loan
and the consent must be witnessed by a plan representative or notary public.Such consent must be received in writing
by ICMA-RC no more thaa ninety(90)days before the loan request is submitted throug�Account Access.In the case
of the Direct Loan Application,spousal consent should be sent along with the application.
The promissory note,truth-in-lending resdssion notice,and disclosure statement are mailed to the employee along
with the issued loan check.The employee confirms receipc and acceptance of these documents and terms at the time
the endorsed check is presented for payment.
Thr Emplo�s herrby aurhoriza all frisun loans agues�ed t�imugh t/x online prncas via Acrnunt Arcess>as w�ll ar arry n-
quesa that tmployas submit on paprr fmms,prnding nrvitw of thr application by ICMA-RC.Notice of loan ixnrance wiU!x
providtd w t{x EmploYer via rrporu potud on tb�FZLink siu.
The loan amount will generally be redeemed from the employee's account on tf►e same day as either ICMA-RC receipt
of loan applicadon(complete and in good order),d►e compledon oFa loan request via telephone with an Investor
Services reptesentative,or the employee's successfW submission oFthe Ioan request throug�Account Access,if it is
s�bmitted prior to 4:00 p.m.ET on�business day. If not, the loan amount will be redeemed on the next business day
following submission.The loan check is generally issued on che n�t business day following redemption,and will be
mailed directly to the employee.The employee's presenunent of the loan check for payment consutuces an acknowi-
edgment that the emPloyee has received and read the loan disclosure information provided by ICMA-RC and agrees to
the terms therein.
Loan tepayment will begin as soon as practicable following the employee's presenunent of the loan checic for paymenc.
V. FrequenC�/Of�OOns[se[ect one]
� Putiapants tnay receive one laan per calendu year.Moreover,partidpants may have only one(1)outstanding loan at a time.
� Parcidpnnts mry receive one loan per calendu year.Moreover,no partidpant cmy have more tfizn&ve(5)loans oatscanding
at one time.
V1. �+OOf1 a1tWYB��
The minimum loan amount is a1,000.
The ma:imum amount of all loans to the partiapant from the plan and all other pluu sponsored by the Employer that are qualified em-
player plans under section 72(p)(4)of the Code is the letier oF
(i) $50,000,reduced by the highest outsranding balance of all lo�ns from any 401 or 457 plans for that parcicipanc during
the one-year period ending on the day before the date a loan is to be made,or
(2) one half of the par�icipant's vested account balance,reduced by the cucrent outstanding balance of a11401 and 4571oans
from all plans for that participant.
If a participant has any loans outstanding at the time a new loan is requested,the new loan will be limited to the maximum amount calcu-
lated above reduced by the total of the outstanding loans.
A loan cannot be issued for more than the above amount.The particip�nc's requested loan amount is subject to downwud adjustment
witfiout notice due to market Ructuation between the time of application and the time the loan is made.
4
Loan C',uid�lina Agrtrmtnt
��. LOB91�1 O'F �OOfI
A loan must be repaid in substantsally equal installments of principal and interest,at least monthly,over a period that does not
e�cceed five(5)years.
Loans for a principal residence must be repaid in substandally equal installments of principal and interest,at
le�st monthly,over a period thu dces not exceed (state number of years] years(maximum 30 years).
VIII. L,oan repayment process
Loan repayments for active employees must be through:
� Payroll deduction only.
PLb42(2)=2
� ACH debit only.'
ru�z(2)=o
❑ Employee may choose either payroll deduction or ACH debit.'
PL642(2)= I
* Please note a$20 processing fee will be assessed to a participant's ICMA-RC account when a scheduled[oan repayment(s)via
ACH is rejected due to iasuf�icient funds,invalid bank acmunt information,or ac.anunt dosure in the parmcipants designated
paytnent acc.ount.
If payroll doda�caon re�paymcnc is allow�ed>and the employee wishes to use this method, the employee must notify the Employer
so that the Employer can ensure that repayment will begin as soon as practicable on a date determined by the Employer's payroll
rycle. Failure to begin payroll deduction in a timely way could lead to the employee's loan entering delinquenry status. Payroll
deduction should begin within two payroll rycles following the employee's receipt of the loan.
Repayments chroug�payroll deducrion will be sent via check or wire by che Employer to ICMA-RC on the following rycle
(choose onej:
� Weekly(52 per year)
� Bi-weekly(26 per year)
� Semi-mont64y(24 per yeu)
� Monthfy(2 2 per yeu}
If ACH debit repaymenc is albwed,debics�om the employee's designated bank account will beg�n approzimately one month fol-
lowing the dzte rhe employ�e's signed ACH�udiori�tion form is received�nd processc�by ICMA-RC,or,in the c�se of online
loans,approzimately one month following the date the lo�n check has been deared for paymenz Debits will normally be made on
a monthly basis.
Loans outstanding for former employees or employees on a leave of�bsence must be repud on the same sc6edule�s if payroll
deductions were still being made unless they reamorme thar loans and est�blis6 a new repryment schedule that provides thac sub-
standally e,qeeal paymer�ts ue made ac le�st mont�ly over the remaining period of rhe loan.
Loan payments,including loan payments from former employees,are allocated to the participant's current election of investment
options on file with ICMA-RC.
The participant may pay off all or a portion of the principal and interest early without penalty or additional fee.Fxtra paymenrs are
appiied Eorwud to both principal and interest as speci�ed in the original repayment schedule,unless�e additional payment is for
the balance due.
5
ICMA- RC
IX. Laan i�N�er�est rail�e
The rate of interest for loans of five(5)years or less will be based on prime plus 0.596•
The rue of interest for loans for a principal residence will be basec{on the FI-iAlVA rate,
Interest rates are determined on the last business day of the month preceding the month tfie ban is disbursed.The interest rate is
locked in at the time a loan is approved and remains constat►t t�►ioughout the Gfe of the loan.
The prime interest rate is deter�nined on the last business day of each month using www nfsn.com u the source.The FHAIVA
interesc race is also determined on the last business day of each month using www.bankofamerica.com as the source.
Loan interest rates for new loans t�ken in different months may Ructuate upward or downward monthly>depending on the move-
ment of the prime and FHA/VA interest rates.
The employer may modify the manner in which loan interest rates will be determined,but only with respect oo Eurure loans.
X. Security/CollaMral
That portion of a participant's account balance that is equal m the amount of the loan is used as collateral for the loan.The collat-
eral amount may not accaed 50 percent of the participant's account balance at the time[he loan is talcen.Only the portion of the
account-balance that corresponds to the amount of the outstanding loan balance is used as rnllateral.
XI. ACtA�r+atiOfl (select one]
� All loans are due and payable in full upon separation from service.
� All loans are due and payable when a participant reoeives a distribution of all of his/her account balance afrer separa-
tion from service.The amount of the outstanding loan balance will be reported as a discribution in addition to the
amount of cash distributed from the plan.
�All loans are due wd payable when a partidpwt reoeives a distribution of part of hisTher account balwce after separz-
tion Erom service.lhe amount of the outstanding loan balance witl be reported as a disaibution in addidon to the
unount of cash distributed fmm the plan.
Xl1. Rean�oriizat�iw�
My ourstanding latn may be r�eamorti�.ed.Reamor�don meatu changing the cerms of a loan,such as length oE re�ayment peri-
od,interes�rate, �nd frequenry of repayments.A loan mzy not be reamortized to eztend the length of rhe Ioan repayment period to
more than&ve{5)years from the date the low�r�s orig�nally made,or in the case of a ban m secu�a principal residrnce,beyond
the number of years specified by the empbyer in Sec�ion V above.
A puticipanc musc request the reamorc'uation of a loan in writing on a reamortvadon application aaxptable to the plu�admiuis-
trator.Upon processing tfie requesc,a new disdaaure statement will be sent to the empbyer for�docsement by the partiapant and
approval by the employer.The ezecuted disclosure scuement must be returned to the plan administrator wirhin 10 calendar days
from the date it is signed.The new disclosure statement is considered an amendment to the original promissory note;thaefore a
new promissory note will not be required.
A reatnortiiarion will not be considered a new loan for purposes of calcularing the number of loans outsranding or the one loan per
calendar year limit.
XIII. Refinancing existing loans
If a puticipant has one outstanding loan, that loan may be refinanced. If a puticipant has more than one oucstanding loan, no
loans may be refinanced. Refinancing means conaurendy repaying an eaisting loan and borrowing an addition�l amounr through
a new loan. Refinancing includes any situation in which one loan replaces another loan and the term of the replacemenc loan does
not exceed the latest permissable term of the replaced loan.
b
Loan Guidtlines Agrtrnrent
The request must be made at a time when the puticipant is eligible to obtain a loan as defined by the employer in Section III
above.The amount of the additional loan amount requested for the purpose of refinancing is subject to the loan limirs specified in
Section IV above.
Because a refinancing is considered a new loan,only active emp[oyees may refinance an outstanding loan. Residenriai loans are not
eligible for re6nance.
XIK Reduction of Loan
IEa participant dies prior to full repayment of the outstanding loan(s),the outstanding loan balance(s)will be deducted from the
account prior to distribution to the beneficiary(ies).The unpaid loan amount is a caxzble distribution and may be subject to early
withdrawal penalties.The pardcipant's estate is responsible for taxes or penalties on the unpaid loan unount,if any.A beneficiary
is responsible for taxes due on the amount he or she receives.A Form 1099 Wi11 be�ssued to both the beneficiary and the estate for
these purposes.
XV. DNIf'fAd D1:1T�t11iOf1
Loan repaymenrs must be made in acoordance with the plan document,plan loan guidelines,and as re9ected in the promissory
note signed by the participant. If a scheduled payment is not paid within 30,60,and/or 90 days of the due date,a notice will be
sent to both the employee and the employer.
A loan will be deemed distributed when a scheduled payment is still unpaid at the end of the calendar quarter following the calen-
dar quarter in which che payment was due.If the total amount of any delinquent payment is not received by ICMA-RC by the end
of the calendar quuter following the calendaz quarter in which they payment was due,the loan is considered a taxable distribution,
and the principal balance,in addition to any accrued interest> is reported as a distriburion to the IRS. However,no money is paid
in this disuibution, because the paiticipant already has the loan proceeds.
The loan is deemed distributed for tax purposes,but it is not an actual distribution and therefore remains an asset of the partici-
pant's acwunt. Interest continues to accrue.7he outstanding loan balance and accrued interest are reported on the participant's
acvount stztement.
Repayment of a deemed distribution will not change or reverse the t�able event.
T6e loan continues to be outstanding,and to acaue interest,until it is repnid or offset using the parcidpant's account balance,M
oSset ran occur only if the partidpant is eligible to ieceive a distribution firom t�e plan as oudined in tfie plan docamen�
Partiapants are required to repay any outstanding laan w6ich 6ac been deemed distributod before they un be eligible For a new
loan.The deemed distribudoa and any interest accrued since the date it became a ta�rable event is taken into account when deter-
mining the muimum amount available for a new low. New loans must be repaid throug�payrnll deduction.
The employer is obligated by federal regulation to comply with the loan guideline requirements applicable to pzrciapuic loans,and
co ensure againsc deemed distribution by monitoring laan repayments,reg�idless of the method of repayment,and by advising em-
ployees if loans are in danger of being dcemed distributed.The tu-quali6ed status or eligibiliry of the entim plan mzy be revoked
in cases of frequen�repayment delinquenry or deemed disaibucion.
XVI. Fees
Fees may be charged for wuious services a.ssociated with the application for and issuance of loans.AI[applicable fees will be debited
from the participant's account balance and/or from the participant's loan repayments prior to crediting the repayment of principal
and interest to the puticipant's account.A schedule of fees applicable to this plan is specified in ICMA-RC's current publication of
Making Sound Invrst»unt D�cisioru.•A R�timnrnt Invrssme»s Guid�.
7
ICMA - Rt
XVII. 01her
The employer has the rig�t to set other terms and condicions as it deems necessary for loans from the plan in order to wmpiy with
any legal requirements.All rerms and oonditions will be administered in a uniform and non-discriminatory manner.
In Witness WhereoF,the employer 6ereby caused these Guidelines to be executed t}us day
of ,20
EMPLOYER Accepced: ICMA RETIREMENi'CORPORATION
B� City of Palm Desert, CALIF. By.
Tide: Title:
Accest: Attesr.
8
LOAN PROGRAM IMPLEMENTATION AT A-GLANtE
In thls Loaa Progrun Implemmtallon Pukage,you wIll 6ad:
• A Guidt to Impltnttnting a Laan Program -This brochure detaiLs the issues you should consider in design-
ing your loan program.
• Laan Guidelina Agnanrnt,far a R�timntnt Plan-These guidelines must be wmpleted before loans c�n
be made ft+om your reurement plan. This document enables you to establish the features of your loan
program.
• Suggtsud Raolution fiir a L�grslatirx Body R�lating to Am�nding a R�timntnt Plan to Ptrmit Loans-We
have included one version that c�n be used for any plan rype-Section 457 Deferred Compensation
plans,Section 401 Money Purchase plans,and Seccion 401 Profit-Shuing plans. If your governing body
requires that a resoludon be p�ssc.�d when amendments are made to the plan,we have induded a suggested
resolution for yout use. If your governing body does not require that a resolution be passed,please disre-
gard the su�ested resolution.
• Loan Administrrttion Agntmrnt f'or 457 Plans-'Ihis document applies only to 4S7 plans where more than
one provider is involved in loan administration. If you have adopted a single 457 p�an docvment under
which ICMA-RC and one or more otfier provide�must operate,you may ultimately have to self-admin-
ister your loan program unless you agree to the requirements spedfied in this Agreement.
• Am�ndmrnt to Adoption Agntnunt for Scction 401 Plan.c-This document applies to 401 plans only and
amends your current plan to allow loans.
Stepa to Impkment a I.oaa Program fiur yoor ICMA-RC Retiremeat PIAn:
(1) CareFully read A Guuk to hnplrnunti�a Laan 13ngranr.
(2) Complete the Loan Gitidtlints Agrrem�nt.
(3) Using tfie Suggested Itesoluaon as a gwde,obttin a resolution from your governing body to adopt the
loan pravidon(if required).
(4) Fsenite the Laan Ad�ri�tist�tion rl�rrtm�nt(457 plans onty)or che Ameridmnrt to Adoprron A�mrn�ru
{40l plans only).
(5) Renun the oompleted Loa�Gxidtlma Aanr»unt>a copy of the resolution(if nequired by your entiry),
and either the Loan Ad�xirtistration Agrrerxt�tt(457�s)or the Anundnttirt to Adoptian Agmment(401
plans) to:
ICMA-RC
Attention: New Busine,sc Ana}yst
T77 NortS Capitol Street NE
Washingcon, DC 20002-4240
Please allow 10 business days to set up your plan to allow loans.
Please contact our Plan Sponsor Services Team ac 800-326-7272 if you have any questions abouc implementing your
Redrement Plan Loan Program.
LOAN PROGRAM IMPIEMENTATiON AT A-GLANCE
Ia thls I.oan Prognm Implemartadoa Pukage,you wlll find:
• A Guidt to Impkmenting a Laan 1'Yognt»t —This brochure details the issues you should consider in design-
iag your loan pmgram.
• Loan Guid�lina Agnemtnt fnr a Retinrnent Plan—These guidelines must be oompleted before loans can
be made from your retirement plan. This document enables you to establis6 the features of your loan
PfOS�n'•
• Suggaud 1?etoolruron fas a Lcgislatirx Body Rrlatin�to Anuriding a R�rircnunt Plan to Ptrmit Loans—We
6ave induded one version thac can be used for wy plan rype—Section 457 Deferced Compensation
pluis,Section 401 Money Purch�se plans,and Section 401 Profit-Shuing pluu. If your goveming body
requires rhat a resoludon be passed vv�en amendments are mzde to the plan,we have induded a suggested
resolution for yout use. If your governing body does not require that a resolution be pissed,please disre-
gard the suggested resolution.
• Loan Administration Agnrment fn�457 Plan�—This docvment applies only to 457 plans where more chan
one pmvider is i�volved in loan adminisuadon. If you have adopted a single 457 plan document under
which ICMA-RC and one or more ocher providers must operate,you may ultimately have to self-admin-
ister your loan program unless you agree to the requirements spedSed in this Agirement.
• Amendmart to Adoption Agnement fnr Sation 401 Planr—lhis document applies to 401 plans only and
amends y�our current plan to allow loans.
Steps to Implemeat a I.oaa Progcam for yoar ICMA RC Rearemmt Plan:
(1) Carefully read A Gr�ide m I�rrpl�nu�tr�a Laax 13ngr�m.
(2) Complete che Ioan Gr�idrli�ruAgrrrnrent.
(3) Using the Suggested Resolution az a guide,obtain a resolution from your governing body to adopt the
lann pravision(if required).
(4) Fzecute the Lo�an Ad�nisristrntio�A�mntnt(457 p�ns on1}r)or c�e Anrerrdsnt�rt to Adoplron A�mnrnrt
(401 pNins only).
(5) Recuin the completed Loan GuidelinaA�ne�nenti a copy of the resolurion(if required by your enrity),
and either t�e Loan Administration Agmmart(457 plzns)or the A�undnunt to Adoption Agn^rm�nt(401
pluu) co:
IC,tiIA-RC
Attrntion: New Business An�lyst
777 Norch Cap;col Scnec NE
Washington, DC 20002-4240
Please allow 10 business days to set up your plan to allow loans.
Please contact our Plan Sponsor Services Team at 800-326-7272 if you have any questions about implementing your
Retirement Plan Loan Program.
1 C M A - R C
A loan program in your retimment plan pravides eligible plan 401 Plan.r. Under tfie Code,only employers can authorize�
participants the ability to borrow funds from their plan account hardship for loan purposes. Upon request, ICMA-RC will
balance.Adding loans to your retirement plan is a big srep.As provide an opinion to you concerning the likely compli-
the administrator of your loan program,ICMA-RC will at- ance of the hardship within the requirementc of che Code
tempt to minimize the amount of resources you need to devote and regulations. Normally,for ioan purposes,hardship and
to the progrun. other specified situuions include,but are not limited to:
unreimbucsed medical�penses,buying or rehabilitating
Hawever,the�are adminlstratls�e and fiduciuy respot�slblli- the participant's principal residence,and prying f+�r college
ties associated wlth offerlag loans which,as a ptactical mat- education for the participant or his/her dependents.Car
tet,cannot be dd�ted to ICMA RG For t6is reason,before loan,car repairs,and the purch�se or repair of a vacation
you design a progratn that is rig�t for you and your employees, or rental property would not be induded in the hardship
there are several issues you may wish to consider.Md the deci- definition.
sions you make in designing your loan program will determine
the resources you,as che plan sponsor,will have to commit to The option you choose to de6ne"loan purpose"in the Eli-
that program. gibility section will have a significant impact on the number
of loans made from your plan.Obviously, if you choose"for
This brochure details the issues you should consider in design- all purposes,"more of your employees will request loans
ing your retirement plan loan program. than if you select"hardship or ot�er specified finandal situ-
adons only."
LOAN GUIDEUNES 457 Plarts:Loans must be coordinated with unforesee-
able emergenry withdrawats.The emergenry withdrawa!
In order to offer loans from a redrement plan,the Internal Rev- regulations under Section 457 of the Code require that an
enue Code(the Code) requires that you establish written guide- emergenry withdrawal be a resource of the"last resort"If
lines chat govern the granting oFloans. Included in this packet the participant is able to take a loan from your ICMA-RC
is t6e Loan Guidelines Agreement that you must complete and 457 plan or any other plan you sponsor,the participant has
formally adopt to esta6lish yout loan program. resources available to meet,or partia�ly meet, the 6nancial
need.Therefore>a participant will be required to take a loan
Along with completing the Loan Guidtlines Agntmtnt,you before taking an emergenry withdrawal.
musr amend your plan document to�Ilow loans.You will need
to send to ICMA-RC a statement esecuted by a desigaated IVI�ny emergency wicfidrawals are not approved because the
o�aa1 or resolution approved by yvur governing body,as finanda!need,while serious,may rat meet tfie condirions
applicable to your plan. In addition,if you are adding a loan itemized in the 457 regulations.T6e ability to take a loan
provision to a 401 plan,the adoption agteement a¢p�ying to will allow patticipants access to money that is not otherwise
that plan must be amended.A sample rrsolution and an adop- available.Md the repayment provisions for loans ensures
rion agneemenc arnendment form u+e included in tfiis pad�age. that participants replenis6 their accounts,thereby preserv-
If you have any questions abour amending your plan document ing the'er retitemrnt savings.
to�llow for loans,pleue c�ll our Plan Sponsor Services Team
coll-free at 800-326-7272. 2. I.o�n Par�ose aod Ap�lica�ion Pt�ooess(Sewion III and
1V in I.o�a Guiddincs A�t+eemeav
1he Code provides you wich some fle�biliry when euablishing �
your l,oan Guidelines as long u the guidelines are consistenc (A) Active Employ+ees Only—Loans are avaihble only to
with the plan document provisions on loans and with section active employees. Former employees,beneficiaries,and
72(p)of the Code. alternate payees may not take a loan.
1. Fliigibility(Secdon II in Loan Gaiddints (B) Request Submittal—If you select to allow
A�t) loans for ALL purposes,ban requem may be submit-
ted by pazticipants through the Acoount Access website
You may allow a loan to be taken from(1)vestcd employer (Online)or with an Investor Services rept�esentative via
contribucions and/or(2) parcidpant account balances.You Loan By Call Center.
may designate whether or not a loan may be taken
If you select to allow loans for hardship purposes,a
(A) for all purposes oc loan application must be completed,signed by the
participant and approved by you,the employer.
(B) only in the case of hardship or other certain spec.-ified
financial situations. Under the Code,the amount of the loan may not
exceed a maximum amount. ?7x anwu��availabl�frir a
loan is af�'rcud by all other loara the pasticipant rnay have
outnanding os has m�nt y paid off fmnr your ICMA-RC
2
A Guide w Inrplemrnting a Loan lingram
nrtirrm�nt plan.and a�ry otjxr r�ti�rmrnt plarayivr�spon- 4. Length of I.oan(Saxion VII In I.oan G�uiddinea
so� Ple�se refer to page 7�r a worksheet illusrrating eat)
6ow maximum loan amounts are ralculaced.The loan
modeling option on ICMA-RC's Account Access web- Generally,all loans must be repaid within frve years From
site inwrporates this calculation automatically. the date the loan is made.There is an excepdon Eor[oans
used to buy,but not to improve or repair,a prindpal resi-
(C) Checic Issuance—If y+nu elect to allow loans dence. [n�e c�se of a loan fnr buying a principal residence,
for ALL purposes,ICMA-RC sends loan documents you may speci£y t�e numbet of years,not to acceed 30,over
with the loan check to the participant.When the par- which the loan must be repaid.
ticipant endorses the check that endorsement sig�ifies
acceptance of loan terms. In detetmining the maximum repayment period for resi-
dential[oans,you should be mindfW that t!►e loan cerm
If you elect to allow loans for HARDSHIP purposes, may extend beyond the period the partidpant is employed
che participant is required to sign the acceptance of a by you.If you allow employees to continue to pay their
promissory note evidencing the loan and disclosure loans after they separate from service(see Acceleration of
scatement,which indudes an amorti7ation sched- Loan Repayment on the next page),c+epayments would
ule.Upon receipt of an apProved loan appGcation, oontinue by the participant,through you,for the enrire
ICMA-RC will prepare these loan documents and send term of the loan(e.g.,30 years). Every payroll period,the
them,along with the loan check The 2oan checic may participant(former employee)will be required to give you
not be g�ven to the parricipant until the loan docu- a check for the periodic loan repayment amount.You then
ments have been signed by the participanc. Because the include this amount with your n�t wnttibuaon submittal
promissory note is oonsidered a plan asset,all loan doo- to ICMA-RC.Loan►rpaymtnts tnay not bt madt dir�rctly to
uments must be complete and preserved by ICMA-RC ICMA-RC!ry tfx participant, unlas you chodsa ACH d�bit as
for at least the life of the loan. a npaymtnt option.
For payroll-deducted loan repayments,once a loan S. �mt Pt�noesa(Scction VIII ia l.oaa Guldc-
is issued,your payroll department must ensure that lines Agreement�
loan repayments are withheld from the employee's pay-
check each pay period,in the unount speci6ed or tfie All loans must be repaid either through payroll deducuon
unortization scheduLe,untJ the loan is repaid in full.It or through ACH debit as long u the emploqee is actively
is essendal tfiat tfie amorti7adon sche�uk coindde with employed by you. For payroll deducted paymencs,ICMA-
your payroll cyde.ICMA-RC can help you determine RC's media(FZLink} used for remitting conaibudon
the Srst pQy date on which you should wirhhold loan detail,allows for tfie inclusion of ban repayment detail.
repayments. Participancs may pay off cheir Imns early by requesang thac
you submit a larger repayment amount from cheir pay on
3. Ft+cq�of I.oaas(Secdon V ia l�wn Gaiddina cheir regularly scheduled repayment dates through your
A�t� rnntriburion submittals to ICMA RC.Please note that no
payment date may be"skipped'even if the employee h�s
Putidpants may receive only one loan per calendar year. made a large payment or submitted multiple payments.
However,you may elect to albw partidpants to have either
The enclosed Loan Guidelims Agreement Form allorvs
(A) only one lou�outstanding ac a time or y�our pian to offer a partidpant the opdon of mal�ing lo�n
repayments via direct debit oEthe employee's bank acoount.
(B) no more than frve loans outscanding at one time. Direct debit is authorized by the participant and�llows
ICMA-RC to debit loan repayments from the parcicipant's
The opdon you choose under Frequenry of Loans will have bank account via Autotnated Clearing House(ACI-n.VPith
an impaa on the number of loans aude from your plan. this feature,you are free of the bucden of estzblishing and
It may also have a direct impact on your payroll system if monitoring payroll deduction and submitting of repay-
you select Payroll Deduction as a repayment optionfor your ments to ICMA-RC.
participants.F.ach loan npaym�nt fnr tach pay pmrad must b�
aaounud fur stpamttl�c Repayments of mulriple loans aze a Please note that you will not be notified directly when
much larger burden on your payroll system(and personnel) a participant's bank account has insufficient funds for a
than a repayment of a single loan, complete loan repayment.'Ihe EZLink loan reports that
witl be available to you online will provide this informa-
tion. It is possible that participant loans may deEau[t more
oken for lack of repayment when participants choose
ACH repayment rather than payroll deduction. You may
choose to restrict cercain participants to payroll deduction
Eor this reason.
3
1 C M A - R C
In implementing a loan prop�acn you should be aware that On the other hand,given the burdens associated with col-
some employers who offer bans throug�their retirement lecting loan repayments ft�om focmer employees,you may
plan hav+e had to contend with d�e in�biGty of some partici- noc wish to maintain a potential�y long term"relationship"
pants to repay their loan(s).You should be awue that you with forcner employees(especially in the case of nsid,ential
may not stop raking ban repayments from the employee's loans).
P�Y'�'�—even if t�ue employee asks tfiat reprymenrs be
stopped.Failure oo payroll-dedua ioan�nymentc on sched- You should c�refully considet the level of responsibility each
ule coutd both jeopardiu the eligibility or qu�lification of tfie option entaiLc.
entire plan�s well as aeate a taxable event for the partidpan�
7. Deemed Distribucion of Iklinqaent Loans (Section XV
Likewise,if an employee is repaying che loan throug�ACH In Lo.n Guiddina Age+eemmd
debit of his/her bank account,and the employee fails to
malce payments,this could jeopudiu the eligibility of your Internal Revenue Service(IRS) regulations governing
retirement plan.Employers are ultimately responsible for partiapant loans issued after December 31,2001,have
ensuring that louis are repaid according to the loan terms. provided clarification on requirements for loan processing.
ICMA-RC assists you by notifying both you and the em- 'Ihe regulztions have alvways established loan criteria,such as
ployee if a payment has not been received. term and borrowing limitations. However,the regulations
now specifirally illustrate how plan sponsors s6ould treat
Your plan may�llow terminated employees to condnue to delinquent loans,which violate the spedal rules allowing
repay their loans either through ACH debit of their bank loans to be made from rerirement plan assets.
account,or by giving/sending you a checic each repayment
period(refer to Acceleration of Loan Repayment section A loan typically beoomes a deemed distribution when
on page three). If you adopt this latter repayment method, scheduled payments aze not made in adherence with the
you will include the repayment amount given to you by the granted"cure period." The maaimum allowable cure period
Former employee in your next reg�ilar employee contribu- is the end of the calendar quarter following the calendar
tion remittance to ICMA-RC. quarter in which the payment was due. For exainple,if a
partiapant's loan gayment is due February ist, the maxi-
If a participant has more than one loan outstanding at any mum cure period for the repayment is June 30th. If the to-
one time,then each loan repayment must be separately tal amount of all delinquent payments is not received by the
reported to ICMA-RC. end of the aue period,the loan is deemed a diuribution.
The principa!balance,in�ddidon to any acrnied interest, is
6. �of I.o�n Re�avmeat(Sectioa XI in I.oan reponed as a distribution to the IRS. However,the tazable
Gaiddines A�eemeat) distribution is not the only evmt in oonjunction with a
deemed disuibudon. The follawving negative consequences
You have thiee options for determining how outstanding oocur as a result of deemed distribution.
loans are accelerated:
• T6e deemed distribudon is a t�ble event.However,
A. All loans are due and payable in full upon che em- it is not an aceual distribadon and therefore remains
ployee's separadon from service.The employee may not an assec oFthe Partiapant's account� 'Ihe outs�anding
continue to pay off his/her lmn once he or she sepa- loan bal�nce and aa-rued inceresc are reporced on the
rates from service. parcicipanc's account sratement.
B. Aker sepzrdtion from service,all lou�s are due and pay- • Repayment of a deemed diuribution will not change or
able in full as soon u the pardapant t�kes a withdrawal reveise the ta�cable event.
of any amount from the plan.
• The loaa wndnues to be considered outsranding until
C. After septnradon from service,all loans are due and pay- it is repaid or"offset"using the participu►t's account
able in full only when the participant withdraws his/her balance. An offset can occur only if the participant is
entire account balance. eligible to receive a distribution from the plan u out-
lined in your plan document.
You should consider these options carefWly>since each pro-
vision could result in a taxable event for the participant. If a • ICMA-RC requires participants to repay any outstand-
participant does not t+epay the outstanding loan amount at ing deemed distributed loan before they can become
the dme it is due, the loan is"foreclosed."This means that eligible for a new loan.The deemed distributed loan
the outstanding loan amount must be reported by the plan and any interest accrued since the date it became a tax-
adtninistrator(ICMA-RC)as a taaable distribution in the able event is taken into account when determining the
yeu of the foreclosure. maximum amount available for a new(oan.
4
A Grridt m Impltrnrnring a Loan I'y»gram
• M IRS ruling requires that a partidpant who has had a 1. Muldole Plans
prior deerned distribution rue2st make repayments to a
new loan�roug�payroll deduction,or provide proof If you offer stveral rrti�rmtntPla�s, each with its own p1an
of adequate securiry. document and provisions unique co each administrator,
ICMA-RC and your other administrators should be able
Employers,as plan sponsors and fiduduies,have an obliga- co administer loans because these are distinct plans and
don to comply with plan document and loan guideline the loan provision applies at the pla�t level. However, the
requirements applicable to pazticipant loans.In this regud, Code sets a maximum on the aggregate of all loans from all
loan payments must be made in accordance with the plan retirement plans in which the employee pamcipates.No
document,plan loan guidelines,and as reAected in the provider will be able to calculate,by itself, the maximum
promissory note signed by the pardcipant. Employers retain amount that a patticipant may borrow at any point in
t}us obligation if there is a loan program associated with time.Since only you,the employer,can determine the cur-
their retirement plan,even if participants apply for loans rent outstanding loan balance and the highest outstanding
online,and regardless of the payroll deduction method of loan balance in the past 12 months from all loans from any
repayment. retirement plans,you will have to calculate the maximum
amount that may be borrowed.This will invobe obtain-
Employeis who do not ensure proper loan repayment ing all loan amounts currently outstanding and repaid in
practices in theit retirement lo�n prograrns risk not only the last 12 months. For your convenience,ICMA-RC has
having individual pazdcipant loans being deemed distribu- developed a worksheet to illustrate the maximum loan
tions,but also potenrially jeopacdize the tax-favored status amount available. [See Page 7,"Calculating the Amount
of che encire plan.In rhe extreme,plans with mismanaged Available for a Loan"]
loan programs—a hig�occurrence of deemed disuibuced
loans,and/or pro�am partidpants in default,for exainple If you elect online loans,partidpants aze asked to input all
—may be disqualified(in the case of 401 plans) or classified outstanding loan balanccs in their online worksheet so that
as ineligible(for 457 plans)by the IRS. Disqualification the program can propedy calculate the maximum amount.
results in the loss of tax-deferred status For all contribucions Par[icipants are on the"honor system"when they enter
and a possible increase in the tauable income for participat- other loan amounts;ICMA-RC is unable to verify any loan
ing employees. amounts associated with plans administered by other pro-
viders. However,if there are any outstu�ding loans in other
It is a plan spoasor's and plan administrator's fiduciary obli- plans administered by ICMA-RC,our online prognm will
gation to properfy manage t6e retinemeat plan and its ben- take�tem into account.
efics.Mismanagement of a loan progFam may be oonsidered
failure co meec rhis fiducaary obligation and may�pose a 2, $in�{e Reti�eaxat pjso/14(niti�e pt+o�viders
plan sponsor to lidgation,in addiaon to being in vioLadon
of appliccable laws and regulations. lf you have adopted a sing;le retirement plan witfi one
master plan document under whic6 ICMA-RC and your
To assiu plan sponso�s whose plan options indude loans, other adminimator(s)mtut opente,then you may ulti-
ICMA-RC will provide repons of parcicipants with pay- mately 6ave to self-administer your ban progrun, r�nlas
ments delinquent by 30 to 89 days,90 or more days but yvu reyuire:
nor yet dee�,and those whose loans have been deemed
distributed.ICMA-RC is oommitted to supporting employ- • that the maaimum that may be borrowed from any
e�who requ�est assistznce witfi their loan programs in order provider is 50 percent of tfie balanae with that provider
to reduce the number of delinquent loans and decrease the �
oa.urrence of deemed distributions.
• chat the loan must be repaid onty to che provider
from which the loan was made.
SPECIAt CIRCUMSTANCES
If you do not impose these requirements,you may have to
If you have more than one redc�ement plan, ICMA-RC will ad- self-administer your loan program.This is because oE
minister your loan program,but you will have to perform some
loan veri6cation activities.You will aLco have to perform these • Problems calculating the loan amount.
activities if loans are available co your employees from several
like redrement plans,such as two different qualified plans,or if The amount available for a loan is basad,in part,on
you have different types of retirement plans (e.g.Section 457 che total acoount balance in thtplan. Since employees
deferred compensation and secdon 401 qualified plan).The may have balances with more than one of the admin-
degree of your invobement will depend on your situation, istrators,only you,the employer,can determine the
actual account balance by aggregacing the balance for
each administrator.
5
1 C M A - R C
The Code sets a marimum on the agg�eg�te of all loans t6e maximum unount that may be borrowed.This will
from all retirement plans in which the participant par- involve obtaining all loan amounts currently outstanding
ticipatec.Since only you can determine the current out- and repaid in the last 12 months. For your convenience,
standing loan balance and the highest outst�nding loan ICMA-RC has developed a worksheet co illustrate the
balance in the past 12 months from all loans from any maximum loan amounc available. [See Page 7, "Calculat-
retirement plans,you will have to calculate the maxi- ing the Amount Available for a Loan A]
mum amount that may be borrowed.'Ihis will involve
obraining a/11oan amounts currendy outstanding and Many 457 plans ue what are referred to u"co-adminis-
repaid in the last 12 months. For your convenience, tered"plans.There are actually two different types of ar-
ICMA-RC has developed a worksheet to illustrate the nngement both of which are referred to as co-administered
maximum loan amount avail�ble. [See Page 7, "Calcu- or co-provider pluis:
lating tf►e Amount Available for a Loan."]
(1) multiple 457 plans offered by an employer through two
• Ptoblems preparing loan documents. or more administrators,each administrator having its
own plan document and features.
Each loan has terms and wnditions that are reflected in
che promissory note,disclosure statement and amortiza- (2) a single 457 p1an with muldple administratocs provid-
tion scfiedule for the loan.Other provideis may be able ing essentially different investment options.
to prepare these docuinents if given all tiie pertinent
information about the loan by you. However,the other In both of these situations, it will be difficult for an ad-
pmvider may be reluctant to provide documents for a ministrator to correctly administer a loan provision across
loan to which it is not a party.And it may be di�cult muldple plans. It will aLso be di�cult for you to correctly
for the other provider's system to provide docvinents fnr administer a loan's provisions in situations where you make
a loan in an amount that exceeds what its system shov�rs loans awdilable to employees from your 457 plan(s) and
is available. another retirement plan (e.g.Section 401 money purchase
or profic sharing plan).
• Problems keeping accurate loan records.
Since loans are generally made and reoordkept on a COIVCI(/S/��11
plan level bosis,theoretically>a puticipant could take a
ban in the amount of his/her entice baLance with one You may be able to minimize your inwtvement in administer-
administratot bec�use the loan is oollateralized by the ing a loan program under eit4sa a single plan/mulriple provider
balance with another adminictracor.And che partici- arruigement or a multiple plan urangemen� Hcrwever,you
pant may etect to alloc�te loan repayments either be- c�nnot avoid having to determine whetfier each loan amount
tween administntocs or to an administrator oth�than requested is consistent wit6 the aggregate maximum.
the administrator who made the loan.Unless a loan is
unique to one of the administrators,both in amount The above informarion is intended to provide an overview
and repayment cerms,only you, tfie employer,will be of the issues and complezities of establishing and mainrain-
able to tradc loan repaymenrs,especial�y if repayments ing a ioan program under the most oommon types of tetire-
are being ande co more t�n one administracor. ment plan arrangements. It is not intended co be all indusive.
Other issues may uise and some issues mry be mirigated by
3. a plan's individual decign. Spec��l situadons and/or solutions
not discussed above will have to be analyr�ed on a case-by-case
If you make loans aw�ilable ro your employeex from all of basis. Please contact ICMA-RC's Plan Sponsor Services Team at
your retirement plans(e.g.SecYion 457 deferred compen- 500-326-7272 wit}►u►y quesrions related to tfiese issues.
sarion pinn and Section 4Ul qualiSed plan),each plan
administrator should be able to administer loans because
these are distinct plans and the loan provision applies at
the plan level. However,no administrator will be able to
calculate, by itself, the maximum amount that a panici-
pant may borrow at any point in time.This is because the
Code secs a maximum on the aggregate of all loans from
all 401 and 457 plans in which the participant partici-
pates. Since only you, the employet, can derermine the
current outstanding loan balance and the highest out-
standing loan balance in the past 12 months fmm al!loans
from any 401 or 457 plans,you will have to calculate
6
A Guide w Inrpltnirnting e Loan PYograni
caicv�an� rHE aMovivr
AYAIIABIE FOR A tOAN
The minimum loan amount is$1,000.
The maximum amouat of all loans to the participant from the Plan and all other plans sponsored by the Employer that
are qualified employer plans under section 72(p)(4)of the Code is tfie lesser oF
(1) $50,000, reduced by the highest outstanding balance of all loans from any 401 or 457 plans for that participarit
during the one-year period ending on the day before the date a loan is to be made,or
(2) 5�19b of the participant's vested account balance,reduced by the cuaenc outstanding balance of a11401 and 457
loans from all plans for that participant.
If a partecipant has any loans outztanding at the time a new loan is requested,the new loan will be limited to the maxi-
mum amount calailated above reducecl by the total of the outstanding loans.
In addidon,each loan must be collateralized,at the time it is made,by one half of the participant's vested aocount bal-
ance in the plan from which the loan is being made.Therefore,the actual amount a participant may take as a loan is the
LESSER of the maximum dollar amount described above or 50 percent of the account balance.
To estimate the maximum amount of a loan for which a participant may be eligible, calculate each step and
select the �S�@P of the total of Step 1 or Step 2. If the participant has had no outstanding 401 or 457 plan
loans in the last 12 moi�ths,you may enter$50,000 as the total in Step 1 and proceed to Step 2.
Step 1. s5�,000 A. $50,000 is the maximum.
B. Enter the hi�est outstanding ban balance during the previous 12
months from 457 and 401 plan loans.
S�j 1 Tit�l S�beract Line B from Li�A,
Step 2. C. Enter So°ib of the present value of the total account balance
in che plan from which the loan will be issued, including any
outstanding ioan balance.
D. Enter the current outstanding 401 and/or 457 plan loan
balance(s).
Ssap 2 Tot�rl Sabtr�ct liae D from Line G
Sup 3. E. Enter the lesser of Step 1 and Step 2 totals.
Ma�imnm I.oaa Amonat�I3ae E
The acluol an�ount N�art i»a�r be 6orrnw�ed w�16e cnkv�ol�d using t/re pa 'ri�anf's
a000vnr bolanu�e on N�e day the loon is nu�cie.
7