The Federal Truth-in-Lending Act ("TILA") generally applies to any entity or individual that offers credit under the following conditions: (1) the credit is offered to a consumer, (2) the credit is primarily for personal, family or household purposes, (3) the credit carries a finance charge, or is payable in more than four installments, and (4) the entity or individual makes more than 25 loans during a year. However, many individuals are not aware that if an employee benefit plan makes more than 25 loans during a year, it would generally be required to make TILA disclosures.
However, the Federal Reserve Board has just (on January 29th of this year) released new final TILA regulations providing an exception for certain employee benefit plans. Under the new regulations, employer-sponsored retirement plans qualified under Code §401(a), tax-sheltered annuities under Code §403(b), and eligible governmental deferred compensation plans under Code §457(b) would be exempt from the TILA requirements "provided that the extension of credit is comprised of fully vested funds from such participant's account and is made in compliance with the Internal Revenue Code." The exemption may apply whether or not the plan is subject to ERISA.
While this is good news and will relieve many plans of an unwelcome credit disclosure burden, there are some downsides. First, the rule is not effective until July 1, 2010. This means that until then, your plan must still make the required Regulation Z TILA disclosures if it is making 25 loans during a year. Second, the exemption does not appear to apply to defined benefit plans making loans (since the credit is not comprised of fully vested funds from a participant's account since such plans do not normally have an account for a participant). Finally, the exemption's applicability may still be questioned in some other non-specified cases. For example, the preamble to the regulations (emphasis added) states that "The exemption for loans taken against employer-sponsored retirement plans was intended to cover all such similar plans...." However, both the preamble (stating that a reason for the exemption was that "the consumer's interest and principal payments on such a loan are reinvested in the consumer's own account") and the regulation itself seem to strongly state that only an individual account plan can be exempt.
But, generally speaking, there is a good chance that, as of next July 1, your plan may no longer have to comply with TILA disclosures thanks to this new regulation! Download the PDF to review a copy of the pertinent pages from the new regulation.
