The topic of the day is plan loans.

I am working with a plan sponsor that sits at the top of a controlled group. The plan sponsor maintains a 401(k) plan in which some of the group members participate. Other group members (particularly those with a majority union workforce) maintain their own 401(k) plans.

From time to time, an employee will move from a non-union group member to a union group member (and vice-versa) after having accrued a sizable account balance. These employees obviously start from scratch in the union plan once they have transferred.

The issue that has come up is whether these transferred employees (who have not experienced a "severance from employment" and who cannot therefore receive distributions from the non-union plan) can be allowed to receive a loan from the non-union plan.

It appears to me that so long as the loan otherwise complies with the 72(p) requirements, the fact that it is made to a former participant is not problematic (at least not from a qualification standpoint--administration of this is a whole other kettle of fish).

All of the group members have a common payroll that is administered by the sponsor of the non-union plan. This should make administering these loans a good bit easier.

Leaving aside the issue of whether sane people would want to do such a thing, does anyone see any problems with this proposal?

Thanks!

The participants in the nonunion plan are parties in interest, therefore they must be able to take a loan. The practice of not allowing loans to persons who are not active participants is based on the person no longer being an employee and thus no longer a party in interest. That practice, when employed unconsciously (which is 99+% of the time) is dangerous because you can run into an inactive participant who is still a party in interest.

As implied by QDROphile, there is a difference between a "former participant" and "an inactive participant".

Why not amend the plans to allow "elective transfers" between the plans? It's my understanding that for these transfers a severance from employment is not required. Then they just transfer their account balances, inclusive of the participant loans, and all of the problems seem to disappear... Am I missing something?