Posted on: Sunday, June 1, 2003

Loans on 401(k) plans may be halted

By Judith Burns
Dow Jones News Service

WASHINGTON — Last summer's crackdown on corporate accounting scandals has created a dilemma for employers offering 401(k) plans that let participants borrow from their retirement-savings account.

Congress made corporate loans to executives illegal, and yet pension laws require that all 401(k) participants be treated alike, putting top brass on the same footing as any employee.

That puts employers in a bind: Complying with one law could force them to violate another.

To be safe, some employers may eliminate 401(k) loans altogether, benefits experts warn, penalizing rank-and-file employees along with those in the executive suite.

Work-based 401(k) plans typically allow participants to borrow from their own accounts for up to five years, tapping up to half of their vested balances or $50,000, whichever is less.

The Labor Department sought to clarify matters last month. It said that employers worried by the new law may ban 401(k) loans to executives without running afoul of Erisa — the Employee Retirement Income Security Act, which requires equal treatment for all retirement-plan participants.

Confusion lingers, however. The Labor Department staked out its position in an informal advisory, rather than a new rule, which may not hold up in court. Moreover, attorneys say it sidestepped the crucial question of whether borrowing from a 401(k) account is a corporate loan subject to strict new prohibitions.

"Nobody knows the right answer," said Randolf Hardock, a partner with the Washington, D.C., law firm of Davis & Harman. "It's a pretty bad situation."

The situation arose last summer when Congress adopted the Sarbanes-Oxley bill, a sweeping package of reforms that included a new ban on executive loans.

Attorney A. Richard Susko, a partner at Cleary Gottlieb Steen & Hamilton in New York, advises clients that 401(k) loans — even to top officers and directors — shouldn't raise alarms.

"I don't think Sarbanes-Oxley prohibits 401(k) loans," said Susko.

If loans are illegal for top executives, Susko said that under a strict reading of pension law, "you would have to cut it out for the rank-and-file as well."

He figures some employers may decide the loans aren't illegal, but halt them anyway until the dust settles.