Effective July 1, 2010, Regulation Z was amended to exempt most plan loans from the reporting and disclosure obligations of the Truth in Lending Act. An extension of credit comprising fully vested funds from the participant’s account in a Section 401(a) employer-sponsored retirement plan, a Section 403(b) tax-sheltered annuity under or a Section 457(b) eligible governmental deferred compensation plan is exempt from the act’s reporting and disclosure requirements, provided the loans are made in compliance with Section 72 of the Internal Revenue Code. The exemption applies to employee benefit plans regardless of whether they are subject to the Employee Retirement Income Security Act of 1974 (ERISA).
Prior to the amendment of Regulation Z, participant loans from employer-sponsored retirement plans were required to provide so-called “truth in lending disclosures,” in the format provided by the regulation, that included various terms of the loan including the amount financed, an itemization of the amount financed, the finance charge, the annual percentage rate, the payment schedule, the total of payments, any demand feature, any prepayment penalties, any late payment charges and any security interest held by the creditor.
When announcing the amendment to Regulation Z, the Federal Reserve acknowledged the distinctions between commercial loans and loans from employee benefit plans to their participants in the amendment’s preamble. The preamble to the Regulation Z amendment notes that an individual who takes a loan from an employee benefit plan is not subject to the same risks and does not need the same protections as an individual who enters into a loan agreement in the open market. Plan loans are further distinguished from open-market loans because a loan from an employee benefit plan requires the repayments of interest and principal to be reinvested in the participant’s own account, and because a loan from an employee benefit plan is not subject to any finance charges imposed by a third party.
The new exemption applies to plan loan disclosures to participants on or after July 1, 2010, but not to plan loans to a beneficiary or alternate payee under a qualified domestic relations order, or QDRO. Additionally, should a loan fail to meet the requirements of the Internal Revenue Code or be made to a beneficiary or alternate payee, the reporting and disclosure obligations under the act remain applicable. However, in light of the new Regulation Z guidance, plan administrators carefully should consider whether to alter plan loan communications, especially if the plan limits loans to active plan participants.