On December 19, 2003, President Bush signed the Servicemembers Civil Relief Act (the “SCRA”) which restates, clarifies, revises and renames the Soldiers’ and Sailors’ Civil Relief Act of 1940. In general, the SCRA temporarily suspends legal proceedings and transactions of individuals entering military service so that they may devote their entire energy to the defense needs of the United States. This article focuses only on the SCRA provision imposing a 6% maximum limit on the interest rate charged to a servicemember for a loan. This interest rate cap is important to plan sponsors because the Department of Labor (the “DOL”) has taken the position that the cap extends to plan loans. (See the DOL’s Frequently Asked Questions for Reservists Being Called to Active Duty at www.dol.gov/ebsa/faqs ). The following summarizes the SCRA rules for the interest rate cap as applied to plan loans.
Military Service Requirement
The SCRA provides relief to members of the uniformed services (Army, Navy, Air Force, Marines, and Coast Guard) who are on active duty, or in the case of a member of the National Guard, service under a call to active duty for a period of more than 30 consecutive days (Section 101(2)).
Servicemember Must Provide Notice
The 6% interest rate is not automatically applied by the plan. To obtain the 6% rate, a servicemember must provide the plan with written notice and a copy of the military orders calling the servicemember to military service. The notice must be provided no later than 180 days after the date of the servicemember’s termination or release from military service (Section 207(b)(1)).
The Limit Is Retroactive to the First Date of Military Service
Once a plan receives timely notice from a servicemember, the interest rate limit is effective as of the date the servicemember was called to military service for the duration of the military service (Section 207(b)(2)).
Limit Only Applies to Pre-service Loans
The 6% interest rate limit only applies to a loan that was made prior to the date the participant entered military service. Therefore, the interest rate for a plan loan to a participant while on active military duty may be determined under the plan’s normal loan policy (Section 207(a)(1)).
Interest in Excess of 6% Is Forgiven
The plan must forgive, not merely postpone, the interest in excess of 6% (Section 207(a)(2)).
Interest Includes Service Charges and Fees
For purposes of calculating the 6% interest limit, the term “interest” includes service charges, renewal charges, fees, or any other charges (except bona fide insurance) with respect to the loan (Section 207(d)).
Plan Administrator May Petition Court to Retain Higher Interest Rate
A court may grant a creditor relief to retain the higher interest rate if it determines that the servicemember’s
military service does not materially affect the servicemember’s ability to pay the higher rate. At this time, there is no authority regarding the extent to which ERISA obligates plan fiduciaries to investigate the “material affect” of a servicemember’s military service on his or her ability to repay a plan loan or the circumstances under which the plan must petition a court to retain a higher interest rate (Section 207(c)).
Interaction with Loan Suspension
A plan may provide that a participant’s loan repayments are suspended during the participant’s military service. However, the interaction between the loan suspension and the SCRA is unclear. For example, one might argue that military service does not materially affect a participant’s ability to repay a loan if the participant’s loan repayment obligation was suspended. However, until there is further authoritative guidance, the plan administrator would have to petition the court to make that determination.
Please feel free to contact us if you have questions about the SCRA or the Uniformed Services Employment and Reemployment Rights Act of 1994 (“USERRA”), which also imposes special rules on plans regarding participants who leave for military service.