Popular, Inc. · NASDAQ:BPOP
Popular — 2023 Popular Retirement Plans Conference
45 slides from Popular's conference presentation, Nov 16, 2023
Slide 1: Best Practices on Handling Participant Loans and Hardship Withdrawals
Best Practices on Handling Participant Loans and Hardship Withdrawals November 16, 2023 By: Mayleen Santiago Garcés Carlos J. Villafañe-Real 2023 Popular Retirement Plans Conference
Slide 2: Disclaimer
Disclaimer ◼ The contents of this presentation has been prepared for educational purposes only. It is not intended as, and it does not constitute, legal advice. It is recommended that anyone who reads this presentation obtains legal advice from their attorney or financial advisor prior to performing
Slide 3: Objectives of the Presentation
Objectives of the Presentation ◼ Laws and regulations that must be complied with for the establishment and operation of participant loan programs and hardship distributions in PR Code qualified retirement plans. ◼ Tax considerations and consequences of noncompliance with the applicable ERISA, federa
Slide 4: Participant Loans
PARTICIPANT LOANS
Slide 5: Participant Loans: Overview
Participant Loans: Overview ◼ Section 406(a)(1)(B) of the Employee Retirement Income Security Act of 1974, as amended (“ERISA”) prohibits the lending of money or other extension of credit between a “plan” and a “party in interest”. ❑ “A fiduciary with respect to a plan shall not cause the plan to en
Slide 6: Participant Loans: Overview (Cont.)
Participant Loans: Overview (Cont.) ◼ A violation of the “Prohibited Transaction” rules constitutes a breach of fiduciary duty under ERISA. ◼ Section 408(b)(1) of ERISA, exempts certain transactions like “participant loans” from being treated as “Prohibited Transactions” if certain requirements are
Slide 7: Loan: Requirements under ERISA and PR Code regulations
Participant Loan: Requirements under ERISA and PR Code regulations ◼ Participant loans must: ❑ Be made available to all participants and beneficiaries on a reasonably equivalent basis. ❑ Not be made available to highly compensated employees in an amount greater than the amount made available to othe
Slide 8: Loan: Requirements under ERISA and PR Code regulations (Cont.)
Participant Loan: Requirements under ERISA and PR Code regulations (Cont.) ◼ Participant loans must: ❑ Bear a reasonable rate of interest. ❑ Be adequately secured.
Slide 9: Reasonably Equivalent Basis
Participant Loans: Reasonably Equivalent Basis ◼ Loans are available to all plan participants and beneficiaries without regard to any individual's race, color, religion, sex, age or national origin. ◼ In making such loans, consideration has been given only to those factors which would be considered
Slide 10: Reasonably Equivalent Basis (Cont.)
Participant Loans: Reasonably Equivalent Basis (Cont.) ◼ A participant loan program will not fail the reasonably equivalent basis requirement if the program established a minimum loan amount of $1,000.
Slide 11: Available to HCE employees in an amount greater than to other employees
Participant Loans: Available to HCE employees in an amount greater than to other employees ◼ Loans will not be considered to be made available to highly compensated employees, officers or shareholders in an amount greater than the amount made available to other employees if, upon consideration of al
Slide 12: Available to HCE employees (Cont.)
Participant loans: Available to HCE employees in an amount greater than to other employees (Cont.) ◼ If the maximum percentage of vested accrued benefit is chosen, a loan program will not fail to meet this requirement solely because maximum loan amounts will vary directly with the size of the partic
Slide 13: Specific Plan Provisions
Participant Loans: Specific Plan Provisions ◼ Participant loans are made in accordance with specific provisions regarding such loans set forth in the plan if: ❑ The plan provisions regarding such loans contain (at a minimum) an explicit authorization for the plan fiduciary responsible for investing
Slide 14: Specific Plan Provisions (Cont.)
Participant Loans: Specific Plan Provisions (Cont.) ❑ The participant loan program which is contained in the plan or in a written document forming part of the plan includes, but need not be limited to, the following (cont.): ✓ A procedure for applying for loans; ✓ The basis on which loans will be ap
Slide 15: Reasonable Rate of Interest
Participant Loans: Reasonable Rate of Interest ◼ A loan will be considered to bear a reasonable rate of interest if such loan provides the plan with a return commensurate with the interest rates charged by persons in the business of lending money for loans which would be made under similar circumsta
Slide 16: Adequate Security
Participant loans: Adequate Security ◼ If the security posted for such loan is something in addition to and supporting a promise to pay (i.e., the promissory note), which is so pledged to the plan that it may be sold, foreclosed upon, or otherwise disposed of upon default of repayment of the loan, t
Slide 17: Adequate Security (Cont.)
Participant loans: Adequate Security (Cont.) ◼ A participant's vested accrued benefit under a plan may be used as security for a participant loan to the extent of the plan's ability to satisfy the participant's outstanding obligation in the event of default. For these purposes: ❑ no more than 50% of
Slide 18: Adequate Security (Cont.)
Participant loans: Adequate Security (Cont.) ❑ a plan will be in compliance with the no more than 50% of the present value of a participant’s vested accrued benefit requirement, with respect to any participant, if it meets the requirement immediately after the origination of each participant loan se
Slide 19: PR Code Requirements
Participant Loans: PR Code Requirements ◼ Section 1081.01(b)(3)(E) incorporates provisions of some of the participant loan rules under US Code Section 72(p): ❑ Level amortization requirement – loan, per its terms and in its operation must be repaid through substantially similar payments at least qua
Slide 20: PR Code Requirements (Cont.)
Participant Loans: PR Code Requirements (Cont.) ❑ Loan term – loan, per its terms and its operation must be repaid in a period not to exceed 5 years, except in the case of a participant loan to finance the purchase of the principal residence, can be repaid for a period no longer than the period esta
Slide 21: Taxation
Participant Loans: Taxation ◼ Generally, participant loans will not be treated as a taxable distribution if the PR Code loan requirements are met. ◼ Participant loans will be treated as defaulted and thus, as a taxable “deemed distribution”: ❑ As of the due date (established under the amortization t
Slide 22: Taxation (Cont.)
Participant Loans: Taxation (Cont.) ◼ Participant loans will be treated as defaulted and thus, a “deemed distribution”: ❑ If the plan document or loan policy provides for a period of correction of the repayment of loans known as a “Cure Period” the participant loan will be considered a “deemed distr
Slide 23: Taxation (Cont.)
Participant Loans: Taxation (Cont.) ◼ Tax treatment of Participant loans will depend: ❑ If deemed distributed prior to separation from service, taxed as a partial payment subject to the ordinary income tax rates of the PR Code and 10% Puerto Rico income tax withholding. ❑ If deemed distributed after
Slide 24: Participant Loans Common Errors and Correction Programs
PARTICIPANT LOANS COMMON ERRORS AND CORRECTION PROGRAMS
Slide 25: Errors Can Happen
Participant Loans: Errors Can Happen ◼ Errors in participant loans often result in a failure: ❑ To comply with the ERISA prohibited transaction exemption and thus, in violations of ERISA’s fiduciary provisions. ❑ To satisfy PR Code nontaxable loan requirements.
Slide 26: Common Errors
Participant Loans: Common Errors ◼ Failure to timely deposit participant loan repayments in trust. ◼ Failure to comply with the limit on participant loan maximum amounts. ◼ Failure to comply with the limit on participant loans in duration or level amortization. ◼ Failure to charge fair market intere
Slide 27: Common Errors (Cont.)
Participant Loans: Common Errors (Cont.) ◼ Erroneous participant loan (no plan loan provision or too many loans). ◼ Failure to obtain spousal consent
Slide 28: Correction of Errors
Participant loans: Correction of Errors ◼ PR Treasury does not have a corrective procedure for the correction of plan loans errors. ◼ Many plan administrators use the IRS Employee Plans Compliance Resolution System (“EPCRS”) procedures as analogous method for correcting plan loan errors. ◼ Most rece
Slide 29: Correction of Errors (Cont.)
Participant loans: Correction of Errors (Cont.) ◼ IRS Notice 2023-43 provides limited interim guidance until official revision of EPCRS is published.
Slide 30: Correction of Errors (Cont.)
Participant loans: Correction of Errors (Cont.) ◼ DOL’s Voluntary Fiduciary Correction Program (VFCP): ❑ Program of correction of ERISA fiduciary violations resulting from some plan loan failures. ❑ On November 21, 2022, the DOL released a proposed amendment and restatement to the VFCP to add a new
Slide 31: Best Practices for Establishing and Maintaining Participant Loan Programs
Best Practices for Establishing and Maintaining Participant Loan Programs ◼ Establish a loan program including carefully reviewing the required forms, procedures for approvals and implementing repayment of loans through payroll. ◼ Coordination between the plan, payroll provider and the recordkeeper
Slide 32: Hardship Withdrawals
HARDSHIP WITHDRAWALS
Slide 33: Hardship Withdrawals: Overview
Hardship Withdrawals: Overview ◼ PR Code Section 1081.01(B)(vi) and its regulations provide that pre-tax contributions can not be distributed to the participant earlier than the occurrence of certain events such as the occurrence of a “hardship”.
Slide 34: Hardship Withdrawal: Requirements
Hardship Withdrawal: Requirements ◼ Hardship withdrawal is a distribution: ❑ that is made by reason of an immediate and heavy financial need of the employee, and ❑ the distribution is necessary to satisfy such financial need. ◼ The determination of the existence of an immediate and heavy financial n
Slide 35: Heavy and Immediate Financial Need (Facts and Circumstances)
Hardship Withdrawal: Heavy and Immediate Financial Need (Facts and Circumstances) ◼ Facts and Circumstances Test. ❑ Under the facts and circumstances test, the employer must analyze all relevant facts and circumstances surrounding the employee’s financial need.
Slide 36: Heavy and Immediate Financial Need (Safe Harbor Test)
Hardship Withdrawal: Heavy and Immediate Financial Need (Safe Harbor Test) ◼ Under the Safe Harbor Test, there is a Heavy and Immediate Financial Need when the distribution is made by reason of: ❑ Medical expenses described in Section 1033.15(a)(4) of the PR Code incurred by the employee, the employ
Slide 37: Distribution Necessary to Satisfy Financial Need (Employee Representations)
Hardship Withdrawal: Distribution Necessary to Satisfy Financial Need (Employee Representations) ◼ A distribution may be considered necessary to satisfy the heavy and immediate financial need if the employer relies on the employee’s representation that the need cannot be satisfied through: ❑ Reimbur
Slide 38: Distribution Necessary to Satisfy Financial Need (Employee Representations) (Cont.)
Hardship Withdrawal: Distribution Necessary to Satisfy Financial Need (Employee Representations) (Cont.) ◼ A distribution may be considered necessary to satisfy the heavy and immediate financial need if the employer relies on the employee’s representation that the need cannot be satisfied through: ❑
Slide 39: Distribution Necessary to Satisfy Financial Need (Requirements)
Hardship Withdrawal: Distribution Necessary to Satisfy Financial Need (Requirements) ◼ A hardship withdrawal is deemed necessary to satisfy a heavy and immediate financial need if all the following requirements are satisfied: ◼ The distribution is not in excess of the amount of the immediate and hea
Slide 40: Distribution Necessary to Satisfy Financial Need (Requirements)(Cont.)
Hardship Withdrawal: Distribution Necessary to Satisfy Financial Need (Requirements)(Cont.) ◼ A hardship withdrawal is deemed necessary to satisfy a heavy and immediate financial need if all the following requirements are satisfied: ❑ The plan, and all other plans maintained by the employer, provide
Slide 41: Distribution Necessary to Satisfy Financial Need (Requirements)(Cont.)
Hardship Withdrawal: Distribution Necessary to Satisfy Financial Need (Requirements)(Cont.) ◼ A hardship withdrawal is deemed necessary to satisfy a heavy and immediate financial need if all the following requirements are satisfied: ❑ The plan, and all other plans maintained by the employer, provide
Slide 42: Hardship Withdrawals: (Taxation)
Hardship Withdrawals: (Taxation) ◼ Taxable as ordinary income in the participant’s income tax return for that year. ◼ Subject to 10% income tax withholding at the time of the distribution. ◼ Must be reported in Form 480.7C in the year of the distribution.
Slide 43: US Code Hardship Withdrawal Rules Not Applicable in Puerto Rico
Hardship Withdrawals: US Code Hardship Withdrawal Rules Not Applicable in Puerto Rico ◼ The US Code: ❑ Includes as a heavy and immediate financial need: ✓ Expenses and losses (including loss of income) incurred by the employee (who lived or worked on the disaster area) on account of a federal declar
Slide 44: US Code Hardship Withdrawal Rules Not Applicable in Puerto Rico (Cont.)
Hardship Withdrawals: US Code Hardship Withdrawal Rules Not Applicable in Puerto Rico (Cont.) ◼ The US Code: ❑ Allows participants to make hardship withdrawals for certain expenses incurred (i.e., educational, medical or funeral expenses) by their “primary” beneficiaries. ❑ Removes: ✓ The suspension
Slide 45: Questions
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