The IRS recently released a "403(b) Fix It Guide" that includes advice on correcting many common errors in 403(b) plan operations. On the topic of plan loans, the Guide (Item 9) advises employers to: "Make sure that there are loan procedures in place." This is an important warning for all employers who offer loans from their retirement plans, but it deserves extra attention from employers who allow employees to borrow from 403(b) and 457(b) plans. As the IRS Fix-It Guide notes, 403(b) plans are especially vulnerable to plan loan errors because they often allow multiple companies (vendors) to administer plan loans. The IRS Fix-It Guide also warns that employers often incorrectly think they can pass legal responsibility for 403(b) loan compliance to the plan vendors. In the words of the IRS:
Plan sponsors are responsible for determining that each participant loan meets the requirements of the loan program and for enforcing loan repayments. "Hold harmless" agreements between a plan sponsor and its vendors don't lessen the plan sponsor's responsibility.
These warnings are important not only for employers that sponsor 403(b) plans, but also for employers that sponsor 457(b) plans. Like 403(b) plans, employers may think of 457(b) plans as "extra" retirement savings vehicles that do not require significant attention because they are administered by multiple vendors who "take responsibility" for the details. This overlooks the requirement that loans among all plans of the employer must be coordinated in order to satisfy tax law limits. Vendors cannot coordinate plans they do not administer. Therefore, the employer must adopt a loan policy that coordinates loans among all plans the employer sponsors.
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