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Employers'
Pensions and Benefits Administration Manual (EPBAM)
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Pension Loans
Introduction
Only active contributing members
are eligible to borrow. Members may take a loan for up to one half of their pension contributions, as long as their loan balance does not exceed the maximum allowed — $50,000 (for member eligibility information, click
here). To apply for a loan, the Member Benefits Online System (MBOS) must be used.
Applying for a Loan through the Member Benefits Online System
EFFECTIVE NOVEMBER 1, 2008, all eligible members of the PERS, TPAF, PFRS, or SPRS wishing to borrow against their pension account MUST submit the loan request through the Pension Loan Application in the Member Benefits Online System (MBOS).
Using MBOS has many advantages:
- The member may confirm that their Loan Application was received.
- MBOS will provide the date a member's loan check will be mailed.
- MBOS will also calculate various repayment options based upon the amount borrowed.
Please direct PERS, TPAF, PFRS, and SPRS members to sign up for MBOS: MBOS User Information.
Members requiring additional help in using the MBOS Loan Application should be directed to the MBOS User's Guide, Pension Loans.
Paper versions of the Loan Application from eligible members of the PERS, TPAF, PFRS, or SPRS WILL NOT be accepted by mail or by FAX after October 31, 2008. Few exceptions apply. Printed applications received by the Division on or after November 1, 2008 will be mailed back to the member with instructions on submitting the loan request through MBOS (see below for specific exceptions).
Exceptions to Online Loan Application Requirement
While the majority of member loan requests will require processing through MBOS, a limited number of members are not able to access the MBOS Loan Application. These member groups include:
- Judicial Retirement System (JRS) members, who should continue to use the paper JRS Loan Application;
- Retirement system members who have established a security freeze on their accounts due to an instance of ID theft (these members must contact the ID Theft Coordinator to request a loan); and
- Employees shown in the loan processing system as inactive from payroll, including:
- Employees who apply for a loan within 6 months of returning from a leave of absence;
- Employees who apply for a loan within 6 months of transferring within the same retirement system to a new employer;
- Employees whose employer was late in submitting the Report of Contributions for the quarterly posting; and
- State employees who are paid on a supplemental payroll schedule.
Members shown as inactive from payroll may still be able to borrow, but a Certified Loan Request form must be submitted by the employer to verify the employee’s active pay status. (Employees from a late-reporting location, after certification, may only borrow amounts based on the previously posted quarter.) Click here to view a sample of the Certified Loan Request form.
The Automated Information System for General Loan Information
The Division of Pensions and Benefits
offers an Automated Information System, at (609) 292-7524,
for general information concerning loans, including the loan amount
a member can borrow, the repayment schedule, and information pertaining
to a particular loan applied for through MBOS.
Loan Provisions and Employer Responsibilities
Member Eligibility
To be eligible, the member must:
- Be an active, contributing member
of the retirement fund.
- Have three years of contributing
membership POSTED to their account. (This usually occurs three
years and three months after date of enrollment).
- The application must be signed
by the member.
- Members are permitted to take
out a maximum of two loans in a calendar year.
- In 2008, the loan interest rate is 4.69 percent per annum on the declining balance of the loan. The administrative processing fee is $8.00.
For information about interest rate changes as of January 1, 2008, as well as other changes resulting from the enactment of Chapter 92, P.L. 2007 and Chapter 103, P.L. 2007, click here.
Please Note: Members who are off payroll may not borrow from their account.
Pension Loan Changes under Chapter 92, P.L. 2007, Chapter 103, P.L 2007
Chapter 92, P.L. 2007 provides for changes to loan interest rates and the possible introduction of administrative fees for pension loans taken by members of State-administered retirement systems that include loan privileges:
- Public Employees’ Retirement System
- Teachers’ Pension and Annuity Fund
- Police and Firemen’s Retirement System
- State Police Retirement System
- Judicial Retirement System.
Loan applications received during calendar year 2008: For eligible borrowers, the interest rate is 4.69 percent per annum on the declining balance of the loan. The administrative processing fee is $8.00. The loan interest rate and administrative processing fee are subject to change each calendar year.
Under Chapter 103, P.L. 2007, PERS and TPAF member contribution rates have been increased to 5.5%. Therefore, higher minimum repayment amounts will be required for pension loans certified after a PERS or TPAF employee’s pension contribution rate changes.
Upon Retirement
If a member retires with an outstanding
loan balance, under the provisions of Chapter 132 PL 1999, the
member has the option to pay off the outstanding loan balance
in its entirety or to repay the loan through deductions from his/her
retirement benefit until the balance of the loan together with
interest is repaid. Payments will be the monthly equivalent of
the amount deducted from the compensation immediately before retirement.
Upon Death
If a member dies before the outstanding
loan balance with interest has been recovered, the remaining balance
will be deducted from the proceeds of any other benefit payable
to the designated beneficiary(ies), including life insurance and
monthly payments.
Upon Withdrawal
If a member terminates employment
and chooses to withdraw all contributions from the pension fund,
any outstanding loan balance must be satisfied. Usually,
the Division of Pensions and Benefits will deduct any outstanding
loan balance from the amount owed the member through the return
of contributions. The member may choose to pay any outstanding
loan in full with a lump sum payment in order to receive the full
amount of the contribution balance on account.
Payroll Certifications
Once a loan has been processed, two
copies of the certification are sent to the employer. One copy
should be forwarded to the member for his/her records, while the
other is retained for the employer's file. The certification of
payroll deductions contains all the pertinent information regarding
the number of deductions and the amount of each deduction to be
withheld from the employee's payroll check.
Employers are required to follow
the instructions on the certification and begin payroll deductions
as instructed on the form. Failure to comply with payroll certifications
will result in additional interest charged to the member's account.
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Revaluation of a Loan Schedule
If a member is off
payroll and misses a scheduled loan deduction(s), any outstanding
loan must be revalued and additional interest charged. In
this situation please contact the Division of Pensions and
Benefits, Office of Client Services, at (609) 292-7524,
and opt for the Employer Menu.
Calculation of an
Additional Loan
When a member applies
for a loan and already has an existing loan balance, the
present value (principle amount) of the existing loan is
calculated and added to the new loan. The resulting increased
obligation is scheduled in the same manner and subject to
the same conditions as the original loan.
Payment of a Loan
Prior to Completion
An active member may
make a lump sum payment against the total value of the loan
at any time. The member may use the Automated Information
System to obtain an estimate of the loan balance. We advise
that the member call or write to the Office of Client Services
at (609) 292-7524 and request the lump sum payoff figure.
The request will generate a quote which will be mailed to
member along with the date the payment is due at the Division
of Pensions and Benefits. The Division of Pensions and Benefits
will not accept any payment unless a payoff figure has been
quoted.
The member should remit a copy
of the payoff quote letter along with the payment to ensure
the proper credit is made to the account.
*****PLEASE
NOTE******
Additional information regarding pension loans is available in Fact Sheet #81, Pension Loans.
Instructions for Completing
the MBOS Loan Application
Eligible members of the PERS, TPAF, PFRS, or SPRS wishing to borrow against their pension account MUST submit the loan request through the Pension Loan Application in the Member Benefits Online System (MBOS).
How Much Is Available for a Loan?
The first step a member should
take when requesting a loan is to determine how much he/she has available to borrow.
MBOS allows members to see just how much they are eligible to borrow. Members can enter different loan amounts to see what the biweekly or monthly repayment amount will be, and the number of repayments that will be needed.
Calling the Automated Information
System at (609) 292-7524 is another convenient way for a member
to learn the amount available. (The Automated Information
System makes many types of basic account information available
to pension members, in addition to loans.)
The member will need to use
a touch tone phone to access the Automated Information System.
The member must have his or her Social Security
number on hand, and a pen for notes.
Additional sources of information
are: Client Services Phone Counselors, at (609) 292-7524,
7:30 AM - 4:30 PM, Monday - Friday.
Also, the Interview Counseling
Section at the Division of Pensions and Benefits, 50 West
State Street, First Floor, Trenton, NJ 08625 can provide
answers to all loan questions (Counselors are available
from 7:40 AM - 4:00 PM, Monday - Friday.
Amount of Loan Requested
Loans are made in multiples
of $10 and may not exceed 50% of the total contributions
posted to a member's account.
When a member has an outstanding
loan balance at the time a new loan is requested, the total
loan balance (old plus new loans) may not exceed the 50%
of total contributions.
The minimum loan amount is
$50. In this case the member may write "$50"
or simply "minimum".
If a member wishes to obtain
the maximum loan available, simply write "maximum"
in Step 2.
Please also see Loan
Compliance for IRS Requirements—Maximum Loan Balance
and Repayment Period and
Loan Compliance for IRS Requirements in 2004—Repaying
Multiple Loans
Loan Repayment Requested
The minimum repayment is scheduled
in equal payments, which will be equal to, or slightly greater
than, the monthly or biweekly base salary multiplied by
the full rate of contribution:
|
5.5% for PERS
and TPAF
8.5 % for PERS Prosecutors Part |
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8.5% for PFRS |
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7.5% for SPRS |
- By law, the member cannot
pay less than the minimum amount, nor may the payment
amount exceed 25% of base salary.
- If the member is paid through
Centralized Payroll, the requested repayment amount on MBOS will indicate "biweekly." If the
member is not paid through Centralized Payroll, the requested
repayment amount should indicate "monthly."
Members should consult the MBOS User's Guide, Pension Loans, and Fact Sheet #81, Pension Loans, for additional information.
Please also see Loan
Compliance for IRS Requirements—Maximum Loan Balance
and Repayment Period and
Loan Compliance for IRS Requirements in 2004—Repaying
Multiple Loans.
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Loan Compliance
for IRS Requirements (2002)
Maximum Balance Allowed and Maximum Repayment Period
Internal Revenue Service regulations
effective January 1, 2002 resulted in changes to the Division
of Pensions and Benefits loan policies. Internal Revenue
Section Code 72(p) requires that loan balances not exceed
$50,000, and requires that they be paid within five years.
As a result, for any loan checks dated after January
1, 2002, loan balances cannot total more than $50,000
and must be repaid within five years. Further, members must
make timely payments toward outstanding loan balances, regardless
of the members' employment status (i.e., "active"
or "inactive").
The following policy changes
will apply only to loan checks dated after January 1, 2002:
- After January 1, 2002, if
a member applies for a loan and that loan added to any
existing loan balance totals $50,000 or more, a loan check
will be sent for the difference under the $50,000 limit.
The Division will notify the member that the requested
loan amount would have caused the loan balance to exceed
the $50,000 limit. If the member is not satisfied with
the payment schedule or the check amount, the uncashed
loan check can be returned.
- Loan checks dated after
January 1, 2002 will have a maximum repayment schedule
of five years. Because the repayment schedule must be
within a five-year period - upon taking a new loan, those
members with large existing loan balances will either
have an increase in the repayment schedule or may be required
to take a smaller loan amount due to the requested payment
exceeding 25 percent of the base salary per month. If
the member is not satisfied with the payment schedule
or the check amount, the uncashed loan check can be returned.
The new IRS regulations also
stipulate that if regular payments are not made on a pension
loan, then the loan is to be considered in default and determined
to be a taxable distribution to the member.
Therefore, members who take a loan after January 1, 2002
and subsequently fail to remit loan payments may also be
subject to IRS limitations as follows:
Members will be notified after
there have been two consecutive quarters of nonpayment (zero
contributions) toward the balance of their outstanding loan,
and offered the following options:
When a loan balance has been
determined to be a taxable distribution,
it is reported to the IRS. The Division of Pensions and
Benefits will send the member a Form 1099-R for tax
filing purposes in January of the following year. The member
will be required to include the portion of the loan representing
before-tax contribution as income on his or her federal
return. In addition, if the member is under age 59½,
he or she will be required to pay an additional ten percent
tax for taking an early pension distribution.
A “taxable distribution”
cannot be canceled by resuming loan payments or repaying
the loan in full prior to the end of the tax year in which
the deemed distribution occurs. Please note that unlike
a normal pension distribution, a loan treated as a distribution
cannot be rolled over to an IRA or another qualified retirement
plan.
Please be advised that the
outstanding loan balance being deemed a taxable distribution
does not cancel the loan obligation, and the loan balance
is still due. The balance can be recuperated at the time
of withdrawal, retirement, or death of the member.
IRS Loan Compliance Regulations
Multiple Loans Taken after January 1, 2004
Effective January 1, 2004,
Internal Revenue Service regulations require the Division
of Pensions and Benefits to change its loan policies regarding
members who take multiple loans concurrently (taking a
new loan before the balance of an existing loan has been
paid off). Under the new IRS regulations, a member taking
multiple loans must repay the combined total of the outstanding
balance of the original loan taken after January 1, 2004,
plus all subsequent loans taken prior to payoff of the
original loan, within five years of the issuance date
of the first loan.
This loan policy change
does not come into play in the case of a member who takes
a single loan after January 1, 2004 and pays it off before
taking another pension loan, but rather when a member
takes additional loans while a balance on the original
loan taken after January 1, 2004 remains. In such instances,
the loan repayment schedule will be set up so that the
total loan balance is paid off within five years of
the issuance date of the original loan, to prevent
the unpaid balance from being declared a taxable
distribution.
Therefore, in cases where
a member takes multiple loans, it is the date of issuance
of the first loan taken after January 1, 2004 that will
establish the maximum five-year payoff period for the
combined outstanding balance of the original loan and
all subsequent loans taken prior to payoff of the original
loan.
(The five-year
maximum repayment schedule policy resulted from a previous
loan policy change in compliance with IRS regulations—see
above).
Loan Policy Change Implications
Under the above regulations,
if a member is issued a new pension loan before the first
loan taken after January 2004 is paid off, a substantial
increase in the member’s repayment amount may result,
in order to ensure full repayment of the total loan balance
within five years of the issuance of the original loan.
Or, the new loan amount requested
may be reduced, so that the payroll deductions required
to repay the loan within this five-year period do not
exceed the 25% of pay restriction in State law.
For additional information,
please consult the applicable Certifying Officer letter
dated November 10, 2003, "New Pension Loan Policy":
State
Certifying Officers
Pension Certifying
Officers
For
a sample letter to use to inform members about this loan
policy change, click here.
Members or employers with questions
can contact Client Services by phone, at (609) 292-7524
or by e-mail, at pensions.nj@treas.state.nj.us
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