Participant loans and ERISA prohibited-transaction relief

P/OPINION 75-108

                                                               408

                          March 5, 1975

Dear           :

This letter is in response to your letter of February 8,
1975, requesting clarification concerning loans from
a pension plan to employees of the employer who established
the pension plan.

Section 414(c)(1) of the Employee Retirement Income Security
Act of 1974 governs all such plans pursuant to a contract
which was in effect on July 1, 1974, and if such loans meet
the three tests set forth in such section, they are not
considered to be a prohibited transaction until June 30,
1984.

With respect to all loans entered into subsequent to the
effective date of the Act and which were not pursuant to
a contract which was in effect on July 1, 1974, such loans
would be prohibited under section 406 of the Act, unless
they met the statutory exemption set forth in section
408(b)(1) of the Act.

The Joint Explanatory Statement of the Conference Committee,
in explaining the basis for the statutory exemption,
states as follows:

       "To be permitted, such loans must be
       made in accord with specific provisions
       in the plan governing such loans. In
       addition, a reasonable interest rate
       must be charged and the loan must be
       adequately secured. Such loans must be
       made available to all participants on a
       reasonably equivalent basis. Consequently,
       the plan could not unreasonably discriminate
       between applicants on the basis of, e.g.,
       age, or sex; but the plan could make
       distinctions on the basis of, e.g., credit
       worthiness or financial need. Also, such
       loans cannot be made available to highly-
       compensated employees in an amount greater
       than the amount available to other employees.
       The conferees intend that this will allow
       a plan to lend the same percentage of
       a person's vested benefits to participants
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P/OPINION 75-108


       with both large and small amounts of accrued
       vested benefits. (However, the percentage
       is to be consistent with the requirements of adequate
       security). The conferees also intend that a plan
       may provide that the same dollar amounts
       may be loaned to participants and beneficiaries
       without regard to the amount of their vested
       benefits if adequate security is otherwise
       provided. For example, a plan could provide
       for loans to participants and beneficiaries
       in an amount up to, e.g., $30,000 to buy a
       house (even if the $30,000 is greater than the
       amount of the participant's or beneficiary's
       vested benefits) if the loan is adequately secured
       by, e.g., a first mortgage on the house."

If any new loans from the plan to employees are proposed,
they would be prohibited unless they fall within the
exemption provided by section 408(b)(1) as elucidated
by the Conference Report.

Sincerely,