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Home My WebLink About03. Possibility of allowing loans from 457 Deferred Compensation Plans3. Central Contra Costa Sanitary District August 8, 2016 TO: VIA: FROM: SUBJECT: ADMINISTRATION COMMITTEE ROGER S. BAILEY, GENERAL MANAGER ANN SASAKI, DEPUTY GENERAL MANAGER THEA VASSALLO, FINANCE MANAGER POSSIBILITY OF ALLOWING LOANS FROM 457 DEFERRED COMPENSATION PLANS Staff has been exploring the possibility of allowing loans from the employees' ICMA 457 deferred compensation plan. The matter was first brought to the attention of the Deferred Compensation Committee (DCC) by staff inquiring about the possibility. In February 2016, the DCC began the conversation with Retirement Plan Specialist, Kim Hammond of ICMA. At that time, Ms. Hammond confirmed that the loan program could be administered easily online through use of the Automated Clearing House (ACH). The loan agreement would be between the employee and ICMA directly. She stated that most agencies that allow for loans generally allowed them for all reasons, since they are not restricted under the Internal Revenue Service (IRS) rules. Another option is to allow loans only for additional hardship reasons, but then the burden of review, setting criteria, administration, and approval would be shifted to the District. She also stated that in the event that an employee takes out a loan, closes their bank account, and defaults on the loan, the District's plan is protected as the employees' account balance secures the loan. A default would trigger a taxable event for the participant and they would receive a 1099 for tax reporting purposes from ICMA. When asked about safeguards against program abusers, Ms. Hammond stated that the abuses could be controlled by limiting the number of loans, and the District has the option to rescind the loan program at any time. Loans would be reported to the District as part of the monthly statement and would be monitored by the DCC as part of their annual review. Advantages to the employee include the following: 1) 457 loans offer lower interest rates, 2) 457 loans are not recorded on the borrowers' credit report, and 3) the application fee is minimal compared to other borrowing methods. Finally, it was discussed that most agencies limit residential loans to 20 years or less. Central Contra Costa Sanitary District Possibility of Allowing Loans from 457 Deferred Compensation Plans Page 2 of 3 In June, the DCC reviewed the results of the District's survey of 14 agencies in California (attached). As indicated in the chart, eight of the 14 agencies surveyed allow loans on their employees' 457 plans, and six allow loans on their employees' 401 plans. The DCC is recommending that loans be available from the employees' 457 only, since those monies are 100% employee contributions. Based on the DCC's discussion with the District's ICMA representative, and the survey taken of other agencies, the DCC is recommending that the District consider entering into an agreement with ICMA to make 457 loans available to employees pending approval by the Administration Committee. The DCC concurred that the Loan Program be subjected to the following guidelines: • New loan program • Loans allowed on 457 only • Account balance used to determine maximum loan will include Roth Accounts • Loans will be allowed for all purposes ("Hardship only" would require more of an administrative burden for the District) • Maximum number of loans —1 at a time • Loan amount o Minimum $1,000 o Maximum $50,000 or half the value of the participant's 457 account • Length of loan o 5 years maximum, or for residential loans o Maximum repayment period on principal residence loan: 10 years (While the maximum repayment period for a principal residence loan can be set to up to 30 years, the maximum recommended by the DCC is 10 years) • Repayment method — ACH debit only (eliminates administrative burden on payroll desk) • Repayment frequency — monthly ACH (participant sets up auto payment with ICMA) • Loan interest rate o Non-residential loans at the prime rate plus 0.05% o Residence loans at the Federal Housing AdministrationNeterans Affairs (FHANA) rate • Security/collateral — participant's account balance • Separation of Service o Outstanding loan shall be due and payable by a participant upon distribution of their entire account balance o If the loan is not paid at separation of service, the employee should continue paying through ACH debit. If the loan is defaulted, ICMA will send the participant and the District several notices when an offset from the participant's account takes place for the balance of the unpaid loan; ICMA-RC will issue a 1099 for the current loan balance plus accrued interest. The DCC confirmed with ICMA representatives on July 15 that ICMA will enforce this action. Central Contra Costa Sanitary District Possibility of Allowing Loans from 457 Deferred Compensation Plans Page 3 of 3 • Reamortization allowed (change in terms) — 5 year maximum, differs for residential • Refinance (new loan replacing outstanding loan) — allowed • Reduction of loan — upon death, unpaid loan amount settled by account balance and becomes a taxable distribution • Deemed distributions — calendar year quarterly • Fees — $50 fee deducted from account • Signatures — employer has the right to set other terms and conditions The DCC met with ICMA representatives Kim Hammond and Michele Martin on July 15 to conduct the annual review of the plan as a whole and discuss the DCC's recommendations laid out in this memo. Should the Administration Committee recommend that the full Board consider allowing employees to take loans from their 457 plans, staff will submit a position paper and resolution for the Board's consideration. Attachment TV: cg Deferred Comp Loan Research June 2016 Central Contra Costa Sanitary District Agency Do employees have 457 Does the agency have a 401a Are loans allowable Are loans allowable on 401a? option? plan? on 457? City of Millbrae - Kenneth Spray, City No No N/A N/A of Millbrae City of San Diego - Gilda Smith, Yes Yes No No Employee Savings Administrator, gcsmith@sandiego.gov Contra Costa Water District (CCWD) - Yes Sonja Stanchina, HR Supervisor, sstanchina@ccwater.com Delta Diablo -Theresa Harris Yes theresah@deltadiablo.org Yes Yes Yes Yes Yes Yes Dublin San Ramon Services District - Yes No Yes N/A Karen Vaden, vaden@dsrsd.com East Bay Municipal Utility District Yes Yes No Yes (EBMUD) - Dhanyale Dunbar, HR Tech, ddunbar@ebmud.com Fairfield -Suisun Sewer District - Yes hgaumann@fssd.com Yes No Only for managers Deferred Comp Loan Research June 2016 Central Contra Costa Sanitary District Agency Do employees have 457 Does the agency have a 401a option? Las Gallinas Valley Sanitary District - Yes Susan McGuire, smcguire@lgvsd.org Napa Sanitation District - Jeff Tucker 707-258-6000 Novato Sanitary District - LauraC@novatosan.ocom Oro Loma Sanitary District - Arlene Wong arlene@oroloma.org San Francisco Public Utilities Commission (SFPUC) - sfersconnect@sfgov.org Yes Yes Yes Yes Union Sanitary District - Maria Buckley Yes mariab@unionsanitary.com plan? No No Yes Yes No Are loans allowable Are loans allowable on 401a? on 457? No* N/A Yes Yes Yes Yes. They have three plans: 1) Yes GM, 2) Work Group Mgrs, 3) Professional Staff. All in the plan must agree to contribute the same amount, you cannot stop contributions once you have started. N/A Yes Yes No at this time, but San Francisco Deferred Compensation Plan (SFDCP) is in the process of developing a loan program to be implemented in the near future. Yes Deferred Comp Loan Research June 2016 Central Contra Costa Sanitary District Agency Do employees have 457 Does the agency have a 401a Are loans allowable Are loans allowable on 401a? option? plan? on 457? West County Wastewater District - Yes No Yes N/A Lisa Adamson ladamson@wcwd.org * Per Susan McGuire, Administrative Services Manager at Las Gallinas Valley Sanitary District, they considered but decided not to offer loans due to administrative issues in tracking repayment and remitting, and "saving people from themselves." When she was in public accounting she used to audit 401k plans and would see people taking out small loans ("'$1k] then having multiple loans etc. She said it can become a headache from the employer's point of view and be a detriment to employees since they are out of the market with their loan balances. Loan Summary 457 401 Yes 8 6 No 5 2 N/A 1 5 Managers Only 1 Total 14 14