Employers' Pensions and Benefits Administration Manual (EPBAM)
   

 

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Pension Loans



TABLE OF CONTENTS
Introduction
Eligibility
Pension Loan Changes under Chapter 92, P.L. 2007and Chapter 103, P.L. 2007
Loan Applications Must Be Submitted through MBOS
MBOS Registration
MBOS User's Kit, Pension Loans
Exceptions
Certification of Payroll Deductions
Revaluation of Loan Schedule
Calculation of Additional Loan
Payment of Loan Prior to Completion
Payment of Loan at Retirement, Death or Withdrawal
Loan Compliance for IRS Requirements (2004)
Repaying Multiple Loans
Loan Compliance for IRS Requirements
Maximum Loan Balance and Repayment Period
Loan Application for JRS Members
Fact Sheet #81, 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

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. Few exceptions apply. Printed applications received by the Division 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.
  • The loan interest rate and administrative processing fee change annually.

Please Note: Members who are off payroll may not borrow from their account.

Pension Loan Changes

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.

Under Chapter 103, P.L. 2007 and Chapter 78, P.L. 2011, PERS and TPAF member contribution rates increased ; 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, P.L. 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 request the lump sum payoff figure via MBOS, using the application "Letters and Statements." 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 and Pension Membership number on hand, and a pen for notes.

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 by appoinment.)

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.  The maximum loan available will be displayed automatically. This amount can be changed.

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:

  • 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.

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Loan Compliance for IRS Requirements
Maximum Balance Allowed and Maximum Repayment Period

Internal Revenue Service regulations 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. 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 policies are as follows:

  • 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 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 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 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:

  • Pay the loan off through a lump sum payment*;
  • Repay the loan in monthly installments through personal billing* ;
  • Take a taxable distribution; or
  • If returning to employment, repay through employer payroll deductions*.

    *The member must return option selection within 30 days of receiving notification. Failure to respond within the 30-day period will result in the unpaid loan balance being declared a taxable distribution.

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

Effective January 1, 2004, Internal Revenue Service regulations required 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 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 and pays it off before taking another pension loan, but rather when a member takes additional loans while a balance on the original loan 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 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.

Under the above regulations, if a member is issued a new pension loan before the first loan 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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Last Updated: July 31, 2013