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5500 Preparer's Manual for 2012 Plan Years
The premier resource in the field of Form 5500 preparation, 5500 Preparer's Manual will help you handle the required annual Form 5500 filings for both pension benefits and welfare benefit plans.
Qualified plans that make loans to participants will, effective July 1, 2010, no longer be required to make detailed disclosures under the Truth in Lending Act. In providing an exemption from governing Regulation Z, the Federal Reserve has acknowledged the inherent differences between commercial loans and plan loans, in which payments of interest and principal are reinvested in the participant’s account and the loan is not subject to finance charges imposed by a third party.
Truth-in-lending disclosures
Plans making 25 or more participant loans (or five or more loans secured by a dwelling) in a current or prior calendar year must make truth-in-lending disclosures under the Truth in Lending Act and governing Regulation Z. As “creditors” under Regulation Z, plans are required to disclose to participants: the amount financed; an itemization of the amount financed (unless the employee has received a statement informing him of the right to an itemized statement and rejected the statement); the finance charge; the annual percentage rate; variable rate; total amount to be paid under all scheduled payments; any demand feature; prepayment penalties; the type of security interest held by the plan; and the number, amount, and timing of payments scheduled to repay the obligation.
CCH Note: Plan sponsors and administrators, noting the substantive differences between commercial credit transactions and plan loans, which are typically secured by the participant’s own account balance, have questioned whether the application of Regulation Z to employee plan loans serves the purposes of the Truth in Lending Act.
Exemption from Regulation Z
The Board of Governors of the Federal Reserve System, incident to a sweeping revision of Regulation Z, provides an exemption, effective July 1, 2010, from the truth-in-lending disclosures for loans from employer-sponsored retirement plans. Under new Federal Reserve Reg. 226.3(g), an extension of credit to a participant in a Code Sec. 401(a) tax-qualified plan, 403(b) plan, or 457(b) plan will be exempt from Regulation Z if: (1) the loan is comprised of fully vested funds from the participant’s account and (2) complies with Code Sec. 72 and other requirements under the Internal Revenue Code.
CCH Note: In issuing the exemption, the Federal Reserve highlighted the differences between commercial transactions subject to the Truth in Lending Act and plan loans. Specifically, the Federal Reserve noted that, under a plan loan, the participant’s interest and principal payments are reinvested in the participant’s own account and the participant is not subject to finance charges imposed by a third party creditor. In addition, the Fed stressed that the cost of a loan taken against assets in a plan participant’s individual account are not comparable to the costs of a third party loan product because the participant pays the interest on the plan loan to himself, rather than to a third party.
Application of ERISA fee disclosure rules
The exemption from the truth-in-lending disclosure requirements does not relieve plans subject to ERISA from DOL regulations that require the disclosure of plan administration fees and information related to the loan (including the procedures for determining a reasonable rate of interest).
CCH Note: The fact that loans from plans subject to ERISA are required to comply with detailed disclosure requirements is a factor obviating the application of Regulation Z to plan loans. However this point does not mean that non-ERISA plans remain subject to Regulation Z. The Federal Reserve, noting that Reg. 226.3(g) does not explicitly reference ERISA or the DOL disclosure regulations, explains that the exemption from Regulation Z applies to plans that are not subject to ERISA. The fact that ERISA’s disclosure rules do not apply to such plans does not change the nature of the loan that allows for the exemption.
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