There are several advantages and disadvantages to implementing a deferred compensation loan program. One of the advantages to a loan program is easier access to deferred compensation funds for employees facing financial hardships. Such a loan program offers employees less rigid regulations than the existing emergency hardship withdrawal process, and could also help encourage employees to participate in the deferred compensation program if they knew they could access their money if and when necessary.
One disadvantage is that, although loans are made with pre-tax money from the participant’s account, loan repayments are made with post-tax money. Therefore, money received by employees via a loan is taxed twice: the first time when the loan is repaid with post-tax monies, and again when funds are distributed to the participant upon retirement or termination of employment.
Another disadvantage is related to loan repayment. Although the employee is essentially repaying himself or herself on the loan plus interest, the employee loses the power of compounding interest had the money not been taken out. In addition, if the loan is not repaid, the outstanding balance of the loan is considered a taxable distribution.
The Deferred Compensation Committee considered the advantages and disadvantages of loans and decided that allowing employees to take out loans would be in the best interest of the Plan and its participants. The Committee is recommending that the Board of Supervisors authorizes the Committee to amend the Plan Document to allow for a loan program that would be available with both deferred compensation providers.
The proposed loan program is summarized below:
• Loan type: no restriction on use of loan; loan must be repaid over a period of 1-5 years (1-20 years for the purchase of a principal residence); no more than two outstanding loans at one time
• Maximum loan amount: $50,000 or 50% of the participant’s account balance, whichever is less. Minimum loan amount: $1,000.
• Interest rate: Prime + 1 percent
• Fees: Annual loan maintenance fee of $50; no setup fee
• Repayment: Automated Clearing House (ACH) from a participant’s checking or savings account. (Nationwide has ACH capability right now. Hartford expects to have ACH capability by fall 2008. Until then, Hartford participants will repay loans by check and then convert to ACH when available.)
The deferred compensation providers will handle all aspects of the administration of the loan program. Through ACH repayment, the involvement of County staff with the program will be minimal. Upon approval by the Board of Supervisors, the proposed loan program can begin immediately.
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