The Board of Governors of the Federal Reserve (the “Board”) amended Regulation Z (“Reg Z”) of the federal Truth in Lending Act (TILA) to exempt retirement plan loans from TILA coverage. TILA and Reg Z generally require creditors to disclose key terms of lending arrangements to consumers, as well as the costs related to that extension of credit. Previously, retirement plans that allowed loans to be taken from participant accounts were subject to the disclosure requirements under Reg Z.
On December 18, 2008, Reg Z was amended to exempt plan loans from the TILA disclosure requirements. In approving the amendment, the Board concluded that plan loans typically come from, and repayments are reinvested in, the borrower’s own plan account. Thus, the need for disclosure in these types of transactions is lessened because there is no third-party creditor imposing interest charges on the borrower.
The new exemption applies to any extension of credit to a participant from:
- an employer-sponsored retirement plan qualified under Code Section 401(a),
- a tax-sheltered annuity under Code Section 403(b), or
- an eligible governmental deferred compensation plan under Code Section 457(b) (including plans not subject to ERISA),
provided that the extension of credit is comprised of fully vested funds from the participant’s account and is made in compliance with other applicable provisions of the Internal Revenue Code.
This means that, effective July 1, 2010, plan sponsors who routinely provide TILA disclosure statements to participants receiving loans from the plan, are no longer required to do so, unless the loan is made from funds that are not fully vested. However, employers who sponsor plans subject to ERISA must still comply with ERISA disclosure requirements, including the disclosure of plan administration fees.