Did you know that, according to the Bureau of Labor Statistics (BLS), the median tenure for American workers has consistently been less than five years for the past five decades? Did you know that one BLS study of workers who are 50 years old showed that they had an average of 11.9 different employers?
Lotta turnover. Lotta turnover among workers with outstanding plan loans. Deloitte once estimated 10 years of $86 Billion in defaulted loans resulted in some $2.5 trillion of lost “potential assets at retirement.” Others have estimated loan leakage at $6 Billion/year. Not sure I agree with either amount because many would have cashed-out anyway, especially those with smaller residual account balances.
On the other hand, both may be underestimates. One study analyzed 780,000 loans and found that the average amount borrowed was just over $7,800 (in 2010), with a median of nearly $4,600. So, most participants may have had an account balance of less than $10,000 (including the loan principal).
Current code/regulations allow for involuntary distribution of residual account balances of less than $5,000. Years ago, the IRS applied a “lookback” rule that allowed for involuntary distributions in certain circumstances where the account balance declined after separation (investment losses) but not others (annuity, installment or single sum distributions). However, that “lookback” rule was changed to exclude single sum distributions made after March 21, 1999.
The sidebar reflects a method one plan sponsor deployed to facilitate rollovers of outstanding loans. Because this plan incorporated electronic banking for plan loan repayment (versus limiting loan payments to payroll deduction), and because the plan facilitated asset retention and account aggregation/consolidation, this process was available to all participants—not just new hires.
Of course, any process you adopt needs to be highlighted/marketed. By adding electronic banking functionality, allowing for multiple plan loans, and incorporating this process, participants can avoid not only the leakage from the loan outstanding at separation, but also, potentially, leakage of residual balances.
Feel free to share any comments, concerns, criticisms or questions. Disagree? Let’s discuss. jacktowarnicky@gmail.com. https://www.linkedin.com/in/jack-towarnicky-5878787/
Disclaimer No. 1: My comments are my own based on my past experiences in plan sponsor roles, and do not necessarily reflect those of any employer or association I have been employed by or affiliated with, past, present or future.
Disclaimer No. 2: This information was provided by individuals with knowledge and experience in the industry and not as legal or tax advice. The issues presented here may have legal implications and you should discuss this matter with legal counsel prior to choosing a course of action. This article is intended to be informational only. It is not (and you/others should not use it as a substitute for) legal, accounting, actuarial, or other professional advice. Any advice contained in this article was not intended or written to be used, and cannot be used by anyone for the purpose of avoiding any Internal Revenue Code penalties that may be imposed on such person [or to promote, market or recommend any transaction or subject addressed herein]. You (others) should seek advice based on your (their) particular circumstances from an independent tax advisor.
Jack Towarnicky provides independent benefits consulting and serves as a member of aequum, LLC and of counsel for Koehler Fitzgerald, LLC.
