ABA Lobbies IRS on Plan Loan Regs

May 21, 2002 (PLANSPONSOR.com) - The Internal Revenue Service (IRS) should not limit the number of retirement plan loans per participant and should loosen rules on participants who have loan defaults.

That was the argument in a letter to the IRS from the American Bar Association (ABA) Section of Taxation Committee on Employee Benefits.

The ABA letter argued that the two-loan rule contained in proposed plan loan regulations released in July 2000 should be dropped. Plans now allowing more than two loans would have to reprogram recordkeeping systems and reeducate employees at some expense, the ABA said.

Not only that, according to the letter, but the loan restriction would encourage participants to pursue a hardship withdrawal, which would not support the policy goal of fostering employee retirement savings.

The ABA letter said the proposal to consider defaulted loans taxable distributions should only be used if the default was caused by non-payment, rather than a technical administrative reason.

It also shouldn’t be considered an abuse for a participant to take out a loan for the purpose of repaying an earlier outstanding loan, the ABA letter said.

The proposed regulations provided that, if the term of a replacement loan for a loan that is refinanced ends after the term of the original refinanced loan, both are treated as outstanding on the date of that transaction.