The Servicemembers Civil Relief Act of 2003 ( SCRA) was signed into law by President Bush on December 19, 2003. The newly enacted law, which is effective immediately, replaces the Soldiers' and Sailors' Civil Relief Act of 1940. The law provides clarification on several financial issues that apply to uniformed military personnel who are on active duty. This law covers qualified retirement plans and other issues as well. This article will discuss only the impact of SCRA on the administration of participant loans from qualified retirement plans.

6% Cap Applies to Loans Incurred Before Commencing Active Duty
The law limits the interest rate that may be charged during a period of active military service to an annual rate of 6%. This limitation is only effective for debt that had been incurred before the servicemember was called up for active duty. Thus, any loans applied for while on active duty are not subject to the 6% cap. The term “interest” is defined as any fee, including renewal charges and service charges, associated with the outstanding loan. Any interest accrued above the limitation rate of 6% is forgiven and is not required to be made up at a later date

Notification Process Clarified
The newly enacted law clarifies one of the most confusing areas of the administrative process – the notification requirements. In order for the 6% interest rate limitation to apply to the participant loan, the servicemember must provide the Plan Administrator with a written notice and a copy of the military orders activating the participant. The deadline for providing the notice is not later than 180 days after the participant's termination or release from military service. The adjustment to the interest rate is effective for the entire period of active military duty. This may require the change to be made retroactively in some instances.

6% Adjustment Concepts
Many plans have adopted the provision of the Uniform Services Employment and Reemployment Rights Act of 1994 (USERRA) that allows for the suspension of participant loan repayments during a period of active military duty. If the suspension provision applies to a participant loan, then the application of the 6% interest rate limitation must be calculated and applied upon the recommencement of payments at the time the participant returns to employment with the Plan Sponsor. However, if the plan does not contain a provision for loan repayment suspension and, thus, the participant has continued making loan repayments prior to notifying the Plan Sponsor of the application of the 6% interest cap, any payment amounts over the 6% limitation must be adjusted to comply with the law.

Waiving the 6% Limit
The participant has the right to voluntarily waive the 6% interest limitation. This may be desirable in the case in a defined contribution plan. For example, the participant may want to continue the larger loan repayments in order to increase the amount of his or her retirement account balance or to shelter additional assets in the plan as they will be afforded ERISA protection in the event of future bankruptcy or legal action.

Alternatively, the Plan Administrator has the right to petition the court to retain the original interest rate if the ability to repay is not affected by the participant's activation to military duty. However, it is not likely that many plan sponsors will care to incur the legal expenses and potential ill will that would accompany the legally enforced retention of the higher interest rate.

Robert M. Kaplan, APA, CFP, CPC, QPA

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