Understanding ERISA and the Retirement Plan Qualification

Lendtable’s innovative financial product is designed to help individuals avoid having to choose between maintaining their living standards and maximizing their retirement savings. Specifically, Lendtable sends cash advances to help workers maintain their current income levels for paying bills and taking care of their loved ones while they contribute to their employer-sponsored benefit plans.

Understandably, the question of whether advances from Lendtable – and particularly the obligation of individuals to repay them - violates specific provisions in the Internal Revenue Code (IRC) or the Employee Retirement Income Security Act of 1974 (ERISA), sometimes comes up. In this article, we’ll analyze the relevant provisions in both IRC and ERISA and explore how Lendtable's product aligns with them. 

Understanding IRC 401(a)(13) and ERISA:

IRC 401(a)(13) is a provision that protects the integrity of qualified retirement plans by prohibiting the assignment or alienation of plan benefits (26 U.S. Code § 401(a)(13)). Generally, this means that participants in such plans cannot sell, transfer, or pledge their benefits to a third party, except under specific circumstances outlined by the IRS.

ERISA is a federal law that establishes certain additional rules and standards for employer-sponsored retirement plans to protect participants and beneficiaries' interests (29 U.S. Code § 1001). ERISA also has an anti-alienation rule, which mirrors IRC 401(a)(13) and similarly prevents the assignment or alienation of benefits from retirement plans (29 U.S. Code § 1056). 

How Lendtable's Product Aligns with IRC 401(a)(13) and ERISA:

Nature of the advance: Lendtable's deposits are personal lines of credit provided to borrowers to help them maintain their living standards, while still maximizing their retirement plan contributions from other funding sources. Like other lending products, these funds are not used directly to make plan contributions and are not derived from the borrower's retirement plan, nor do they represent a transfer of benefits to or from any plan. Therefore, the advances themselves would not infringe on the provisions of IRC 401(a)(13) (26 U.S. Code § 401) or ERISA's anti-alienation rule (29 U.S. Code § 1056).

Repayment terms: Lendtable requires borrowers to repay the principal and a pre-determined fee, aka the Profit Share. The repayment obligation is a personal obligation, not an obligation of the retirement plan. As is the case with other personal loans, borrowers are permitted to use their personal income or a wide variety of other non-retirement assets to fulfill their repayment obligations, meaning that Lendtable's product would not violate the anti-assignment and alienation provisions of IRC 401(a)(13) (26 U.S. Code § 401(a)(13)) or ERISA (29 U.S. Code § 1056).

Customers may choose any available legal option to repay outstanding obligations, including but not limited to debit and credit accounts, proceeds from a bank or other financial account, including withdrawals or loans from retirement accounts or other savings vehicles deposited first to their bank account and at the customer’s choosing.

These legal provisions do not prohibit individuals who are participants in 401(k) or other retirement plans from taking personal loans where their plans are not parties to the loans and their plan benefits are not pledged as security for the loans. 

Plan loans: Retirement plans may offer loans to participants under certain conditions, as set forth in IRC 72(p) (26 U.S. Code § 72(p)) and ERISA (29 U.S. Code § 1108). However, Lendtable's product is not a loan from a plan (or for that matter, a loan to a plan). Thus, it is not subject to the plan loan rules and limitations set forth under the IRC or ERISA.

Plan qualification: Lendtable's product would not jeopardize any retirement plan's qualification under IRC 401(a) (26 U.S. Code § 401(a)), due to the IRC’s prohibitions against assignments and alienations of plan benefits. Lendtable provides personal loans that plan participants can use to pay living expenses (allowing them to save for retirement through payroll contributions and employer match), requires repayment from non-retirement sources, and does not have any legal or equitable interest in any retirement plan assets whatsoever. Thus, Lendtable’s product would not jeopardize the tax-qualified status of any employer's retirement plan.

Fiduciary responsibility: ERISA imposes fiduciary responsibilities on those who manage and control retirement plan assets (29 U.S. Code § 1104). Lendtable does not have fiduciary responsibility over any retirement plan assets, and assets held in retirement plans are not subject to the agreements between individual borrowers and Lendtable. As such, its product would not conflict with the fiduciary requirements set forth under ERISA.

Prohibited transactions: ERISA and IRC both contain prohibited transaction rules, which restrict certain transactions between a retirement plan and "parties in interest" or "disqualified persons" (29 U.S. Code § 1106, 26 U.S. Code § 4975). Lendtable's product, however, would not be considered a prohibited transaction under these rules, as it is not a transaction between the retirement plan and a party in interest or a disqualified person. The advances provided by Lendtable are not loans to any retirement plan and are not intended to be used directly to fund retirement plan contributions.  Moreover, Lendtable is not a fiduciary or service provider to retirement plans and therefore should not be considered a party in interest or a disqualified person to plans simply because plan participants use Lendtable’s product. 

Reporting and disclosure: ERISA mandates specific reporting and disclosure requirements for retirement plans, such as the provision of a Summary Plan Description (SPD) and the filing of Form 5500 (29 U.S. Code § 1021, 29 U.S. Code § 1024). Lendtable's product, being separate from the retirement plan itself, would not trigger additional reporting or disclosure obligations for the plan.

Based on this analysis of the relevant tax and legal provisions, it is conclusive that Lendtable's products do not violate IRC 401(a)(13) (26 U.S. Code § 401(a)(13)) or any provision in ERISA (29 U.S. Code §§ 1001-1461). By providing personal loans to which retirement plans are not parties and accepting repayment from a wide variety of non-retirement sources, Lendtable operates within the bounds of tax and legal regulations while helping individuals maximize their retirement savings potential.

Article written by David Goldsmith.

Lendtable is not a law firm, and we cannot offer legal or tax advice. As with any financial product or service, it is essential to conduct due diligence and consult with your legal counsel, financial advisor or tax professional – as you believe is appropriate - before making any decisions. However, the innovative approach taken by Lendtable demonstrates the potential for creative solutions that can enhance retirement savings without running afoul of IRS or ERISA regulations.