Participant loan death and disability protection

(a)

Qualified participant loan protection arrangement

Section 414 of the Internal Revenue Code of 1986 is amended by inserting at the end the following new subsection:

(y)

Qualified participant loan protection arrangement

(1)

In general

For purposes of this title, the term qualified participant loan protection arrangement means an arrangement under which a participant or beneficiary who receives (directly or indirectly) any amount as a loan from an eligible retirement plan described in clause (iii), (iv), or (vi) of section 402(c)(8)(B) has the option to obtain protection against death and disability in the manner described in paragraph (2). (2)

Manner of providing protection

For purposes of paragraph (1)— (A)

Manner of protection

Protection against death and disability described in this paragraph is protection provided through— (i)a group insurance policy issued to the plan for the sole purpose of providing participant and beneficiary loan death and disability insurance, or (ii)a debt protection product in which debt protection is provided through appropriate commercial contractual liability insurance. (B)

Cost of debt protection

For purposes of subparagraph (A)(ii), a product shall not be treated as a debt protection product unless the cost of such product is allocated to the accounts of participants or beneficiaries with outstanding loans. (C)

Reimbursement requirement

An arrangement shall not be treated as providing protection against death and disability for purposes of paragraph (1) unless under such arrangement— (i)the plan, upon death or disability of the participant or beneficiary, is required to cancel any outstanding loan balance, and (ii)such protection provides for payment to the plan of— (I)an amount equal to the outstanding loan balance of the participant or beneficiary, and (II)the amount taken into account under section 402(m)(1)(B). (D)

Election to opt out of coverage

Protection against death and disability under a qualified participant loan protection arrangement shall apply unless a participant or beneficiary elects in writing to receive a loan without protection against participant death or disability. Any such election shall be irrevocable. (3)

Rate of interest

A loan described in paragraph (1) shall not be treated as failing to bear a reasonable rate of interest for purposes of any requirement of law solely because the rate of interest under the loan is reduced by the cost of the death and disability protection provided pursuant to this subsection, and such protection may be taken into account in determining whether a loan bears a reasonable rate of interest. (4)

Definitions

For purpose of this subsection— (A)

Debt protection product

The term debt protection product means a loan term or contractual arrangement modifying loan terms under which a plan agrees to— (i)cancel all or part of a participant’s or beneficiary’s obligation to repay an extension of credit from that plan upon the occurrence of a specified event; and (ii)in the event of a participant’s or beneficiary’s death or disability, credit to the account of such participant or beneficiary of an additional amount equal to the amount taken into account under section 402(m)(1)(B).

Such loan term or contractual arrangement may be separate from or a part of other loan documents.

(B)

Disability

The term disability means an impairment described in section 72(m)(7) that causes a participant to be disabled within the meaning of section 72(m)(7). (5)

Special rule

A debt protection product used in connection with a qualified participant loan protection arrangement shall not be treated as a swap (as defined by section 1a(47) of the Commodity Exchange Act (7 U.S.C. 1a(47))) or as a security-based swap (as defined by section 3(a)(68) of the Securities Exchange Act of 1934 (15 U.S.C. 78c(a)(68))).

(b)

Deemed distribution in event of death or disability

Paragraph (2) of section 72(p) of the Internal Revenue Code of 1986 is amended by redesignating subparagraph (D) as subparagraph (E) and by inserting after subparagraph (C) the following new subparagraph:

(D)

Qualified participant loan protection arrangement

In the event of the death or disability of a participant or beneficiary, the amount of any outstanding loan to the participant or beneficiary that is cancelled pursuant to a group insurance policy or debt protection product that was made available under a qualified participant loan protection arrangement described in section 414(y) shall be— (i)paid to the plan and credited to the interest in the plan of the participant or beneficiary, (ii)deemed distributed to such participant or beneficiary (or his or her specified beneficiaries) on the date of such payment, and (iii)treated as an amount described in paragraph (1)(A) on the date of such payment and not as an amount described in section 61(a)(12).

(c)

Exception to income inclusion rules relating to purchase of life insurance protection

Subparagraph (B) of section 72(m)(3) of the Internal Revenue Code of 1986 is amended by adding at the end the following new sentence: This subparagraph shall not apply to any amount that is a repayment of a loan to a participant or beneficiary by a plan described in subparagraph (A)(i) or a trust described in subparagraph (A)(ii), if that repayment is applied to the purchase of participant and beneficiary loan death and disability protection pursuant to a qualified participant loan protection arrangement described in section 414(y).. (d)

Exclusion from gross income for certain distributions pursuant to cancelled loan

Section 402 of the Internal Revenue Code of 1986 (relating to the taxability of beneficiary of employees’ trust) is amended by inserting at the end the following new subsection:

(m)

Certain distributions pursuant to cancelled loan

(1)

In general

In the case of an employee to whom paragraph (2) applies (or the beneficiary of such employee), gross income of such employee (or such beneficiary) does not include any distribution from the eligible retirement plan described in paragraph (2)(A) to the extent that— (A)such distribution is made on or before the day prescribed by law (including extensions of time) for filing such employee’s or beneficiary’s return for the taxable year in which such employee dies or becomes disabled, and (B)the aggregate amount of such distributions does not exceed the excess of— (i)the proceeds of the group insurance policy or debt protection product through which the protection described in paragraph (2)(B) is provided, over (ii)the amount of the deemed distribution described in paragraph (2)(D).

For purposes of clause (i), not more than 135 percent of the amount described in clause (ii) shall be taken into account.

(2)

Application

This paragraph shall apply to an employee who— (A)receives a loan from an eligible retirement plan described in clause (iii), (iv) or (vi) of subsection (c)(8)(B), (B)obtains the protection described in section 414(y)(2) pursuant to a qualified participant and beneficiary death and disability protection arrangement described in section 414(y) with respect to such loan, (C)dies or becomes disabled, and (D)is deemed to receive a distribution pursuant to section 72(p)(2)(D) following such death or disability with respect to such loan. (3)

Distribution

A distribution described in paragraph (1) shall be treated as not violating the requirements of sections 401(k)(2), 403(b)(7)(A)(ii), and 403(b)(11). (4)

Otherwise distributable amount

A group insurance policy or debt protection product may provide that the amount that would otherwise be distributable pursuant to this subsection may be paid directly by the issuer of such group insurance policy or debt protection product to the employee. Any such amount shall be treated as paid to the eligible retirement plan and distributed to the employee pursuant to this subsection.

(e)

Effective date

The amendments made by this section shall be take effect with respect to loans made after the one year period beginning on the day after the date of enactment of this Act. (f)

Application of fiduciary standards under Employee Retirement Income Security Act of 1974 with respect to A qualified participant loan protection arrangement

No person that, as a fiduciary of an eligible retirement plan described in clause (iii), (iv) or (vi) of section 402(c)(8)(B) of the Internal Revenue Code of 1986, whether or not such person has adopted a qualified participant loan protection arrangement (as defined section 414(y) of such Code (added by subsection (a) of this section)), shall be deemed to have violated section 404 or 406 of the Employee Retirement Income Security Act of 1974 in connection with adopting or not adopting such an arrangement.