Plaintiff appealed from an administrative determination of the Board of the Teachers' Pension and Annuity Fund (TPAF) rejecting her request that a portion of interest payments owed on her pension loan be waived. In 2004, plaintiff secured a $26,860 pension loan from TPAF and retired after having made two payments through payroll deduction. The Division of Pensions and Benefits (Division) did not deduct plaintiff's loan payments from her distributions once she had retired, and she did not inquire about her loan repayment status between 2004 and 2017.
In September 2017, the Division notified plaintiff that an audit of pension loans revealed she owed an outstanding balance of $25,973.83 plus additional accrued interest of $21,227, for a total of $47,200.83 and that it would begin deducting loan payments from her monthly retirement allowance to cover the repayment of principal and interest. Plaintiff offered to repay the remaining balance and five years of interest, at four percent, in a lump sum payment if the Board of Trustees for TPAF (Board) would waive the interest accrued after the original five-year term. The Board rejected her offer and denied her request to waive the accrued interest assessed on her outstanding loan obligation. Notably, the State had entered into a closing agreement with the Internal Revenue Service (IRS) under which outstanding pension loans, plus interest, would be repaid to State-administered retirement systems, including TPAF, to protect their tax-qualified status. Plaintiff appealed the Board's determination.
The trial court affirmed the Board. The Internal Revenue Code, § 72(p), N.J.S.A. 18A:66-35, N.J.S.A. 18A:66-35.1, and N.J.S.A. 18A:66-63 controlled the interest obligation, even though it was the Division's fault the payments were not deducted from plaintiff's pension checks.
When a pension loan is not repaid within five years of its distribution, the loan funds are essentially converted to taxable income as a "deemed distribution." I.R.C. § 72(p)(2)(B) sets forth an exception from a taxable deemed distribution for a loan from a qualified employer plan, provided the loan is repaid within five years. I.R.C. § 72(p)(1) ("If during any taxable year a participant or beneficiary receives, directly or indirectly, any amount as a loan from a qualified employer plan, such amount shall be treated as having been received by such individual as a distribution under such plan."). Repayment of interest to TPAF is crucial to maintain the pension plan's tax-qualified status.
The Board's decision was not arbitrary, capricious, or unreasonable. The Board's decision comported with the IRS requirement that TPAF collect a sum sufficient to repay the amount borrowed with interest thereon.