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Apr 16, 2008 7:07 pm


I just spent an hour on hold with IRS, only to have them tell me they will get back to me within 15 days with a response to my question.  I'm also getting mixed answers from vets @ my office, and our home office, so if anyone could point me in the right direction, I'd be very grateful!  Here goes:   I have a client that took a $10,000 loan from their 403B 5 years ago (at the time of the loan, they were with AIG VALIC).  The client missed their first loan payment (they *claim* they were never told the loan had to be repaid within a certain period of time...I'm sure they just weren't paying attention) and the loan went into to default.  So for that tax year, they had to pay taxes + penalty on the premature distribution.  No problem.   I transferred (90-24) this account to my firm (not AIG) last year (pre-9/24).  The client is now in a bind again, and wants to take another loan from the 403B...can they?   One person at my office told me that "once you default on a 403B loan, you can never take another one for the rest of your life" - that doesn't make any sense to me if the previous tax consequences have already been taken care of, and there are no other 401K/403B loans currently outstanding.  Can anyone confirm/dispel that for me?   Thanks!
Apr 16, 2008 7:25 pm

I don’t know, but it sounds like you need a better client.  Just sayin’

Apr 17, 2008 12:03 am

I can tell you what would happen on a 401k loan and it should be similar to the 403(b).  403(b) plans are a bit different though.

The loan policy of the company sponsoring the loan would write in their loan policy if loans are allowed after another loan has gone into default.  This is something that can be determined by the company. If the plan only allows for one loan to be outstanding and the one loan they took out is in default, the loan is considered a "deemed loan."  Even though they have defaulted and paid taxes, the loan is still active since the participant has not reached a qualifying event for a regular distribution like severance of employement, death, disability, retirement, etc.  If the loan is still active (even though it has been taxed) the participant cannot take another loan since the plan only allow for one oustanding loan. (even a taxed defaulted loan).   If the plan allow for two loans and one is defaulted, the plan can also have their provision in the loan policy that says a participant may not take other loans if they have previously defaulted on a loan or they may not have that provision in their policy.  If they have the provision, they can't take another loan, if they don't they can.    So, it really depends on the plan's loan policy and the number of loans that they can have outstanding.  You should also know that the previously defaulted loan will count against the maximum loan that can be taken since it is still considered outstanding.   The thing I am not sure about is how easy it will be to get your hands on the loan policy for the 403(b).  I think they were previously not required but they are going to be required going forward.  See the link below from a google search I did:   Perhaps when you call the 403(b) sponsor to get the loan policy, you can offer to help bring them  into compliance with the new 403(b) regs.  It looks like participants used to be able to self certify their compliance with loan regs! Bad idea considering your client!  Doesn't look like they can do that any more.  Also, take a look at the new 90-24 restrictions on the link I posted. 
Apr 17, 2008 2:54 am
Mike Damone:

I don’t know, but it sounds like you need a better client.  Just sayin’

  Amen...sounds like someone that is too stupid to be helped.   Ice, sorry this isn't any more helpful than it is, but you're describing the kind of client I enjoy firing.
Apr 17, 2008 1:07 pm

Ice, if a second loan goes into default it will be taxed and penalized just like the first one.  What I am not sure about on 403(b) plans is who used to coordinate things like the maximum loan amounts and the maximum number of loans outstanding.  It sounds like nobody was really keeping track of this much which is why congress has put more responsibility on the plan sponsor to track this.  If I remember today, I will ask some of my counterparts who deal with 403(b) plans who polices the loans and any funky default rules on 403(b).

Apr 17, 2008 2:11 pm

No offense taken guys…I completely agree!  Unfortunately, this is one of those clients that is a gatekeeper of sorts to other clients/prospects (of a better caliber, of course).  It’s really a bizarre situation,  I wish I could post more details, but I know I probably shouldn’t. 

  Does your b/d have an "Advanced Markets" department?  The few times I have a had tricky situation I just called them and they gave me the answer I needed.  
Apr 26, 2008 3:40 am

Ice, I am interested to know how this worked out. 

May 23, 2008 3:50 am

If someone has defaulted on a 403(b), the only way they make take another (even if it was with another company) is to have the payments on the new loan paid via payroll deduction.  The IRS added this stipulation at some point since 2002 (I can't recall exactly).  This poses a bit of a problem.  To accomplish this, you need to have a non-qualified payroll slot set up.  It has been my experiece that districts are LOATHED to add new slots, even more so now with the new regs. 

By the way, there is no way that your client wasn't made aware of the need to repay the loan.  I'm sure they signed some paperwork requesting a loan.  That paperwork states the terms of the loan. 
Sep 5, 2013 5:00 am

Wouldn’t it be better if your client left this one alone and instead applied for a personal loan via another agency or a bank? Let’s say the IRS changes some of its policies and the client holds your organization responsible – and could find a loophole to get away with passing any penalties onto you. You mentioned that this particular client is a purported gatekeeper to better prospects and clients, so that means they could just as easily drop your firm if they could prove you mishandled their contribution plans. Hope you find the path of least resistance!

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