On December 18, 2008, the Board of Governors of the Federal Reserve System approved final rules which amend the regulations implementing the Truth in Lending Act of 1968 (“TILA”), widely known as “Regulation Z.” Among other things, the revised rules now exempt loans taken from employersponsored retirement plans, which were previously subject to Regulation Z.
TILA and Regulation Z generally require creditors to disclose key terms of lending arrangements to consumers, as well as the costs related to that extension of credit. While TILA covers both openand closed-end credit, the amendments made on December 18 largely affect only open-end, or revolving, credit arrangements. Previously, 401(k), 403(b) and 457(b) plans that allowed loans to be taken against participant accounts were subject to Regulation Z. As a result, plan administrators of such plans were required to follow Regulation Z’s rules with regard to the determination of finance charges and the APR applicable to such loans, and the requirement of disclosures and periodic statements to the participant taking such loan.
However, Section 226.3(g) of Regulation Z, added by the new final rules, specifically exempts most loans taken by employees against their employersponsored retirement plans from TILA and Regulation Z. Under the new provision, an extension of credit to a participant in (i) an employer-sponsored retirement plan that has been qualified under Section 401(a) of the Internal Revenue Code (the “Code”), (ii) a tax-sheltered annuity under Section 403(b) of the Code, or (iii) an eligible governmental deferred compensation plan under Section 457(b) of the Code will be exempt from TILA and Regulation Z, so long as the loan is comprised of fully-vested funds from such participant’s account, and the loan is made in compliance with all relevant provisions of the Code. The Federal Reserve Board noted in its summary to the final rules that this exemption will apply to employer-sponsored retirement plans regardless of whether that plan is subject to the Employee Retirement Income Security Act of 1974 (“ERISA”).
For 401(k), 403(b) or 457(b) plans that allow plan participants to borrow from their plan accounts, the addition of Section 226.3(g) is a welcome change. As the Federal Reserve Board noted in its summary, loans taken by participants from their employer-sponsored retirement plan are vastly different from other types of revolving credit, such as credit cards, in that the participant’s interest and principal payments on the loan are reinvested into their plan account, instead of interest payments going to a third-party creditor. The Federal Reserve Board also observed that employersponsored retirement plans which are subject to ERISA must already disclose plan administration fees under regulations promulgated by the Department of Labor. Excepting employer-sponsored retirement plans from Regulation Z will come as relief to plan administrators who must maintain compliance with both the Internal Revenue Code and ERISA. The final rules amending Regulation Z become effective on July 1, 2010.