[15416]
December 3, 2002
TO: PENSION MEMBERS No. 58-02
PENSION OPERATIONS ADVISORY COMMITTEE No. 80-02
RE: IRS ISSUES FINAL REGULATIONS ON PLAN LOANS
The Internal Revenue Service has issued final regulations under Code section 72(p)
regarding loans from qualified employer plans to plan participants or beneficiaries. These
regulations adopt with modifications the proposed regulations issued in July 2000.1 Notably,
the final regulations are responsive to a number of recommendations made by the Institute.2
The following discussion summarizes the revisions and clarifications reflected in the final
regulations.
Multiple Loans. Consistent with the Institute’s comments, the final regulations do not
include any limitation on the number of loans that can be made under Code section 72(p). The
proposed regulations had provided that a deemed distribution would occur if a participant
obtains more than two loans per year.
Loans After Deemed Distributions. The final regulations retain the proposed rule
imposing additional requirements on loans issued to a plan participant or beneficiary who had
defaulted on a previously issued loan. Accordingly, for loans made subsequent to a loan that
has been deemed distributed, the plan must enter into an agreement under which either
repayments are made by payroll withholding or adequate security for the additional loan (in
addition to the participant’s accrued benefit) is obtained.
1 See Institute Memorandum to Pension Members No. 41-00 and Pension Operations Advisory Committee No. 59-00,
dated August 2, 2000. The IRS in July 2000 had issued both final and proposed regulations under section 72(p) of the
Internal Revenue Code. The final regulations addressed, among other things, the formation and required terms of
loan agreements, the determination of deemed distributions, the treatment of loans after deemed distributions, and
“cure” periods for missed payments. The proposed regulations addressed the suspension of loan payments during a
leave of absence for military service, the effect of a new loan following a deemed distribution of a prior loan, and the
effect of refinancings and multiple loans. The preamble to the proposed regulations also requested comments on the
application of the Electronic Signature in Global and National Commerce Act (ESIGN).
2 See Institute Memorandum to Pension Committee No. 81-00, Pension Operations Advisory Committee No. 80-00
and October 11th Conference Call Participants, dated October 31, 2000.
2
The preamble to the final regulations, however, observes that in order to satisfy the
limitations on the maximum amount that may be borrowed from a plan, the issuer of any loan
under section 72(p)(2) must inquire about other loans made from the plan or any other plan of
the employer before extending a loan. The preamble, therefore, provides that the issuer can
condition a new loan on a participant’s disclosure of such prior loans and, for this purpose, rely
on an employee’s certification concerning the status of the prior loans, assuming the issuer has
no reason to doubt the employee’s certification.
Loan Refinancing Arrangements. The final regulations generally adopt the proposed
rules on loan refinancings. Thus, a refinancing arrangement must satisfy the requirements of
section 72(p)(2)(B) and (C) that loans be repaid in substantially level installments, not less often
than quarterly and over a period not in excess of five years. Additionally, a refinancing is
treated as a continuation of the prior loan, plus a new loan to the extent of any increase in the
loan balance. The final regulations, however, reflect a modification that accommodates the
extension of a prior loan with an original term of less than five years to a term of five years from
the date of the prior loan.
Application of ESIGN. The preamble to the final regulations notes that the IRS and the
Treasury anticipate issuing proposed regulations on the extent to which notices under the
various Code requirements relating to qualified retirement plans can be provided electronically
(taking into account the effect of ESIGN). These proposed regulations may consider the
requirements applicable to electronic plan loan agreements.
Additionally, a footnote in the preamble discusses the applicability of the Federal
Reserve Board’s Regulation Z — which implements the requirements of the Truth in Lending
Act — to plan loans. Specifically, the footnote states that the staff of the Board of Governors of
the Federal Reserve System has advised the IRS that a plan loan satisfying section 72(p)(2) and
the final regulations would constitute an extension of credit under 12 C.F.R. 226.2(a)(14) of
Regulation Z. Thus, unless the plan or the loan is otherwise exempt from Regulation Z, a plan
loan that satisfies the requirements of Q&A 3(b) of the regulations (i.e., the enforceable
agreement requirement) would be subject to the disclosure and other requirements of
Regulation Z. The staff of the Board has also advised that pending the Board’s adoption of final
rules on electronic disclosures, creditors may provide electronic disclosures required by
Regulation Z if the consumer’s consent is obtained as required under ESIGN.3
Loans Under 457(b) Plans. With regard to the permissibility of plan loans from
governmental 457 plans, the preamble to the final regulations notes that proposed regulations
under section 4574 issued earlier this year clarify the conditions under which loans can be made
to participants and that section 72(p) applies to such loans.5
3 See 67 Fed. Reg. 71824 n. 1 (December 3, 2002).
4 See Institute Memorandum to Pension Committee No. 16-02 and Pension Operations Advisory Committee No. 32-
02, dated May 9, 2002.
5 The Institute’s letter in response to the proposed plan loan regulations had sought clarification that governmental
employers could offer loans to 457(b) plan participants in a manner consistent with section 72(p).
3
Loan Repayment Suspension During Military Service. The final regulations generally
adopt the regulations as proposed with regard to the suspension of loan repayments for periods
during which a participant is performing military service.6 Accordingly, a plan that permits
suspension of loan repayments during a leave of absence for military service will not cause the
loan to be deemed distributed, even if the leave exceeds a year.
Effective Date. While the preamble to the final regulations provides an “effective date”
of December 3, 2002, both the preamble and the final regulations specify that the final
regulations apply to assignments, pledges, and loans made on or after January 1, 2004.7
Thomas T. Kim
Associate Counsel
Note: Not all recipients receive the attachment. To obtain a copy of the attachment, please visit our members website
(http://members.ici.org) and search for memo 15416, or call the ICI Library at (202) 326-8304 and request the
attachment for memo 15416.
Attachment (in .pdf format)
6 Two modifications are reflected in the final regulations with regard to this rule. First, an example in the final
regulations has been modified to reflect the application of a maximum 6 percent interest rate during military leave
pursuant to the Soldier’s and Sailors’ Civil Relief Act Amendments of 1942. Second, the final regulations clarify that
loan repayments can be revised at the end of a military leave to extend the repayment schedule in the event the loan
originally had a term of less than five years. The latter revision is consistent with the change made to the loan
refinancing rules.
7 The preamble also provides that the final regulations do not apply to loans made under an insurance contract that is
in effect on December 31, 2003, if the insurance carrier is required to offer loans to contractholders that are not
secured (other than by the participant’s or beneficiary’s benefit under the contract).