The basics of the Envoy Choice loan program for your plan
An employer-sponsored retirement plan may allow participants to borrow from their accounts. If your plan allows Participant loans, the available loan amounts are governed by Internal Revenue Code and Department of Labor regulations, as well as by the Plan Document. The basics of the Envoy Choice loan program for your plan are described below:
Maximum Loan Amount (1): Lesser of $50,000 or 50% of vested account balance
Minimum Loan Amount: $1,000
Interest Rate (paid to the Participant's Account): Prime plus 1%
Maximum Number of Loans Outstanding (2): 1
Personal Loan Maximum Term: 5 years
Residential Loan Maximum Term (3): 30 years
Minimum Term: 1 year
Spousal Consent: Required if married
Loan Repayment (4): Payroll deduction only
Loan Payoff (5): Any time
Loan Default (6): After 90-day non-repayment period
Loan Initiation Expense: One time and deducted from the Participant's account
Loan Maintenance Expense: Monthly and deducted from the Participant's account
(1) The maximum amount that the plan can permit as a loan is 50% of the Participant's vested account balance or $50,000, whichever is less. For example, if a Participant has a vested account balance of $40,000, the maximum amount that he or she can borrow from the account is $20,000.
(2) The thirty year amortization period available for a residential loan applies to the purchase of a primary residence only. It does not apply to other types of home purchases. As the Plan Administrator, you will need to verify that the loan proceeds are being used for the purchase of a primary residence. Many Plan Administrators ask to see a copy of the Participant's Purchase Agreement (or other like document) for the primary residence.
(3) A Participant may not have more than one outstanding loan at a time. If a Participant with an outstanding loan wishes to secure a new loan, the existing loan must be paid off prior to initiating the new loan. In determining the maximum amount that can be borrowed for the new loan, the $50,000 limit described above is reduced by the difference between the highest outstanding balance of the Participant's prior loan during the 12-month period ending on the day before the new loan and the outstanding balance of the participant's loans from the plan on the date of the new loan.
The Loan Modeling Tool that is available to Participants on the Envoy Web Portal will calculate the "available loan amount" for the Participant. If there was an outstanding loan amount in the previous 12-month period, the outstanding loan value will be factored into the newly calculated available loan amount.
(4) Loan repayments are withheld from a Participant's payroll via salary reduction. Loan repayments are "after-tax" deductions. The loan repayments are remitted to the plan along with the periodic contribution submissions. The Comprehensive Payroll Data file that is used for contribution submissions includes a column for loan repayment amounts.
(5) If a Participant with an outstanding loan terminates employment, the outstanding loan will need to be paid in full within 90 days. Otherwise, the loan will default. This "deemed distribution" is a taxable event to the Participant. The Participant will receive a 1099-R for the outstanding loan balance in January of the year following the year in which the loan defaulted.
(6) If a Participant with an outstanding loan chooses to stop their payroll withholding loan repayments, their outstanding loan will also go into default at the end of a 90-day non-repayment period. This "deemed distribution" is a taxable event to the Participant. The Participant will receive a 1099-R for the outstanding loan balance in January of the year following the year in which the loan defaulted.
Detailed Instructions for the Plan Sponsor and the Participant
Step #1 - Participant:
- Go to www.EnvoyFinancial.com and click Account Login
Enter your username, password, and select Account Holder from the drop-down menu
- On the top menu, select Take Money Out and choose Loans and Withdrawals from the drop-down menu
- Under Loans, select the loan type: Personal Loan or Residential Loan
- Enter the Loan Amount to borrow, repayment months, and follow the instructions to complete request
- Enter the number of payments for the loan. For example, if you are paid on a bi-weekly basis and wish to request a 5-year loan, the number of payments would be 130 (26 x 5 = 130)
Step #2 - Envoy:
Envoy will send an email message to the Participant and the Plan Sponsor including:
- Promissory Note and Security Agreement
- Amortization schedule
Step #3 - Participant:
The Participant must complete and sign the Promissory Note and Security Agreement. If the Participant is married, their spouse must also sign the form. The completed Promissory Note and Security Agreement must be returned to you, the Plan Sponsor.
Step #4 - Envoy:
- Envoy will deduct a loan initiation expense from the account.
- Envoy will liquidate the loan principal amount requested by the Participant.
- Envoy will direct the payment to you, the Plan Sponsor.
Step #5 - Plan Sponsor:
- Secure the signed Promissory Note and Security Agreement from the Participant
- Verify that the Promissory Note and Security Agreement is properly signed by Participant and spouse, if married.
- Sign the Promissory Note as the Plan Administrator and retain a copy in HR records. In the event of an IRS audit of the retirement plan, this documentation will likely need to be provided to the auditor.
- Deliver the loan check from MG Trust (plan custodian) to the Participant.
- Set up the Participant's loan repayments in accordance with the Loan Amortization Schedule in the payroll system.
- Include scheduled loan payments in the Comprehensive Payroll Data file submitted to Envoy each pay period.
- Monitor amortization of the loan and discontinue loan payments upon completion of the payments.