Effective July 1, 2010, participant loans taken from employer-sponsored retirement plans will no longer be subject to the requirements of the Truth in Lending Act of 1968 (TILA) and the regulation implementing TILA known as Regulation Z. The Board of Governors of the Federal Reserve recently approved an amendment to Regulation Z that exempts most retirement plan loans to participants.
Lenders generally must disclose certain key terms and costs associated with lending arrangements to consumers, as such disclosures are required by TILA and Regulation Z. Moreover, retirement plans that permit participant loans (such as 401(k), 403(b), and 457(b) plans) were previously subject to the disclosure requirements imposed by TILA and Regulation Z. Compliance with these rules was considered a burden by plan administrators because finance charges and the applicable APR needed to be determined and disclosed in participant statements.
The recent amendment to Regulation Z exempting plan loans from TILA applies to an extension of credit in (i) an employer-sponsored retirement plan that is qualified under Section 401(a) of the Internal Revenue Code (Code); (ii) a tax-sheltered annuity under Section 403(b) of the Code; and (iii) an eligible government deferred compensation plan under Section 457(b) of the Code. To qualify for the exemption, the loan must be comprised of fully vested funds from the participant’s account and be made in compliance with all applicable provisions of the Code. The exemption applies to retirement plans regardless of whether such plan is subject to the Employee Retirement Income Security Act of 1974.