Loan Restrictions Following Default
The January 2009
Future $umTimes described the procedure for obtaining a
Distribution Certificate when applying for a loan or hardship
withdrawal through the AHRP. This certificate is required to
document compliance with recent 403(b) regulatory changes.
When arranging for a loan or hardship withdrawal through the
AHRP Web site or through the AHRP Retirement Center, the participant
is directed to a Web site hosted by AIG Retirement Manager where data
from all 403(b) plans offered to our employees is aggregated and used
to verify eligibility and amounts available to the participant. If the
participant meets the qualifying criteria, he/she will be able to
print off a Disbursement Certificate verifying eligibility for the
requested distribution. The certificate is then returned to the AHRP
Retirement Center along with other requested information to complete
the transaction.
Participants who have defaulted on previous AHRP or other TSA
provider loans have found that the AIG Retirement Manager will
deny a Disbursement Certificate for a second loan. This has caused
some confusion because AHRP provisions indicate an individual may take
up to two loans at any one time.
However, the AIG Retirement Manager is correctly denying access to a
second loan if the participant has previously defaulted on a loan.
IRS rules allow another loan following the default on a previous loan
under certain conditions. These conditions require either
repayment of a new loan through direct payroll deductions or that the
participant provide collateral for the new loan. The AHRP has not
chosen to make either of these options available and consequently
a defaulted loan prevents the participant from further borrowing from
his/her retirement savings.
There is one remedy that will allow a participant to further borrow
from his/her AHRP account following default on a loan. If the
participant restores his/her AHRP account with the defaulted balance
together with accumulated interest, the default will be satisfied.
This repayment is made with after-tax dollars and is segregated from
pre-tax funds within the participant’s account so the amount re-paid
will not be taxed when subsequently distributed from the account. Only
earnings from the repayment date onward are taxable.
A participant will need to coordinate with the AHRP Retirement
Center at (800) 730-2477 if he/she wishes to restore an AHRP
defaulted loan. If the defaulted loan has been from another 403(b)
provider account, the restoral process must take place through that
provider.
(An illustration where restoring a loan would make sense is
when a participant had defaulted on a relatively small loan which
could be restored to make a larger loan available.)
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