Two Items of Note With Regard to Plan Loans

October 2010Newsletters For Your Benefit

In late September 2010, the Financial Accounting Standards Board (FASB) approved its position that participant loans from defined contribution plans (profit sharing, 401(k) and money purchase pension plans) should be classified, for financial reporting purposes, as receivables. These are to be segregated from plan investments and reported at the outstanding principal amount plus accrued but unpaid interest. This classification guidance is to be applied prospectively for plan years ending after December 15, 2010, but may be adopted earlier.

The new position, however, is more a change in form than of substance. To this point, most plans have classified participant loans as plan investments. Since existing guidance dictates that plan investments be reported at fair market value, most plans have carried participant loans on the books at the unpaid balance, plus any accrued but unpaid interest, as that was deemed to be a good faith approximation of fair value.

While we are on the subject of participant loans … Effective July 1, 2010, the Federal Reserve amended Regulation Z under the Truth in Lending Act to exempt employer-sponsored retirement plans that make participant loans from the Truth in Lending Act disclosure requirements. In issuing the exemption, the Federal Reserve recognized that because payments of principal and interest by a plan participant are reinvested in the participant’s account, and because plan loans are not subject to finance charges imposed by third parties, a participant who takes a loan from his or her retirement plan is not subject to the risks inherent in a commercial loan and, as such, and is not in need of the full disclosure protections afforded by Regulation Z. Nevertheless, it is important to remember not only must all plan loans be documented and administered properly, but fee, interest and repayment information must be disclosed to participants in order to ensure compliance with ERISA, the Internal Revenue Code and state consumer protection laws.

For more information regarding this topic, please contact Susan Foreman Jordan at 412.391.1334 or [email protected]