HomeMy WebLinkAboutLoan Policy Post-PPA 2022City of Rexburg Salary Reduction Plan
LOAN POLICY
Pursuant to the terms of City of Rexburg Salary Reduction Plan (the "Plan"), the Plan Administrator has adopted a
participant loan program as part of such Plan and Trust. All loans granted or renewed on or after the 1st day of
January, 2022 will be made in accordance with the provisions specified in the Plan and under this Loan Policy. The
Plan intends this loan program to comply with all applicable requirements of the Internal Revenue Code and the
Department of Labor. Violating the terms of this Policy may cause a loan to be treated as a taxable distribution from
the Plan.
Administration of Program.
City of Rexburg (the "Loan Administrator") is responsible for the administration of this loan program. All loan
requests and other inquiries should be delivered to:
City of Rexburg
35 N. 1st East
Rexburg, ID 83440
(208) 359-3020
Application Procedure.
The Loan Administrator will make loan applications available to any individual who has a vested interest under the
Plan. An eligible individual, as defined within this Policy, may apply for a loan by returning a paper loan application.
Loan applications will be processed as soon as administratively feasible following receipt of the completed loan
application.
The Loan Administrator will review the loan application for completeness. Incomplete applications will be returned
and must be resubmitted for consideration. All loan applicants must meet the requirements of this Policy for
consideration and approval. If the loan applicant fails to meet the requirements of this Policy and receives a loan
disbursement, the loan will be treated as a "deemed distribution" and reported as taxable to the IRS.
Basis for Approvals.
Loans are available to all actively employed participants.
Loans will be available without regard to any individual's race, color, religion, sex, age, or national origin.
Each application is reviewed on a nondiscriminatory basis. However, its approval will depend on the applicant's
creditworthiness.
In addition, if a participant submits a loan application at a time when a decision concerning a domestic relations
order is pending or the Plan Administrator is on notice that divorce is in progress, the loan request will be placed on
hold until the order is finalized or the determination period expires.
Once the loan is approved, a Promissory Note will be generated and issued to the applicant. The applicant must
sign the Promissory Note to acknowledge and document receipt of the loan disbursement from the Plan and to
affirm such applicant's obligation to make the required repayments.
Spousal Consent.
If a married participant submits a loan application, spousal consent is required.
Terms of the Loan.
Subject to the limitations on the amount of any loan, a participant may request a loan for any purpose.
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Loan Amounts.
The Loan Administrator will determine the available loan amount at the time the loan request is approved. The
maximum amount of any loan is the lesser of 50% of the participant's vested interest minus any existing loan
balance, or $50,000 reduced by the participant's highest outstanding loan balance in the previous twelve months
even if all or a portion of this amount has been repaid.
To calculate the maximum loan amount, the participant's vested interest in all plans established or maintained by
the employer or a related employer of the employer will be considered. Notwithstanding, the Plan limits the minimum
amount of any loan to $1,000.
An individual may have no more than one loan outstanding at any one time. Refinancing of an existing loan is not
permitted.
Sources for a Loan - Accounts and Investment Options.
The Loan Administrator will select the accounts and investment fund or funds from which the amount necessary to
grant the loan will be taken in a nondiscriminatory manner. However, the loan will not be taken from any insurance
policies.
Loans may be taken from all vested participant accounts.
The loan will be transferred to a segregated account. During the term of the loan, this segregated account will be
maintained, and each scheduled principal and interest repayment will be made to this segregated account, until the
entire loan is paid in full. This segregated account will not share in any gains or losses credited to the Plan that do
not directly relate to the loan.
Interest Rate and Fees.
Interest will be charged on each loan. From time to time, the Loan Administrator will review the interest rate charged
for loans, with the intention of providing the Plan with a return commensurate with the interest rates that a
commercial lender would charge for loans made under similar circumstances. The interest rate for a loan will take
into account the creditworthiness of the participant and the terms of the loan.
The interest rate on the loan will be the prime rate as used by The Wall Street Journal adjusted by 2 percentage
point(s). The prime rate will be determined on the date the loan is distributed.
Once the interest rate is determined, the amount of the loan will be amortized according to the selected repayment
terms. Each repayment will include both principal and interest until the loan is no longer outstanding in the Plan.
Security for a Loan.
All loans must be adequately secured with at least 50% of the participant's vested account balance in the Plan. The
security interest will be determined and measured at the time the loan is granted. The participant must secure each
loan with an irrevocable pledge and assignment of at least 50% of such participant's vested account balance under
the Plan.
Repayment Terms.
With limited exceptions, the Internal Revenue Code requires a loan to be repaid through level installment payments
at least quarterly, over a period not to exceed 5 years.
Under this Loan Policy, a loan is required to be repaid within 5 years, starting from the payment date outlined in the
Promissory Note.
However, if the loan application is for a residential loan and the Loan Administrator confirms that there is sufficient
documentation that the entire proceeds of the loan will be used to acquire a dwelling unit that will be used as the
participant's principal residence, within a reasonable time, then this residential loan must be repaid within 5 years of
the original date of the loan.
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A principal residence is a house, apartment, condominium, or mobile home (not used on a transient basis)
established and used as the participant's principal dwelling unit.
Loans are to be repaid based on substantially level amortization over the term of the loan with payments made each
pay period.
Loan payments will be made through payroll deduction.
Early Payoff.
The participant may elect, in writing to the Loan Administrator, to pay off an entire outstanding loan balance in full
prior to its due date.
Default and Offset.
A loan is in default when a scheduled installment payment has not been received by the scheduled due date. If the
participant fails to arrange for the repayment of the missed payment, in a manner that is reasonably acceptable to
the Loan Administrator, the remaining principal and accrued interest on the loan will be declared due and payable.
The missed payment must be received by the end of the "cure period". The end of the cure period will be the last
day of the calendar quarter following the calendar quarter in which the scheduled installment payment was due.
After this date, the Loan Administrator will notify the participant in writing that the loan is in default.
The outstanding loan (including accrued interest) will become taxable and treated as a "deemed distribution". A
deemed distribution means the entire outstanding loan balance is immediately due and the Loan Administrator will
report and process the outstanding loan amount as a taxable distribution from the Plan. The defaulted loan
(outstanding principal plus accrued interest thru the date the loan was deemed distributed) will be reported as
taxable income on IRS Form 1099-R. It will be subject to federal and state income taxes, and a 10% additional tax
on early distributions if the default occurs before age 59-1/2. This amount will not be eligible for rollover to another
employer plan or IRA.
The participant is still under an obligation to the Plan to repay the loan. Therefore, the Promissory Note will remain
outstanding and interest will continue to accrue. This outstanding loan obligation will be offset against the
participant's vested account balance when the participant is eligible to take a distribution of their account balance for
the sources that were used to fund the loan.
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