If your 401(k) plan maintains a participant loan program, you may discover that you have compliance concerns thanks to a relatively obscure Florida tax statue.
Under its revenue laws, Florida imposes a document tax on loan transactions that are made, signed, executed, issued, or otherwise transacted in the State. The Florida Department of Revenue has specifically ruled that 401(k) plan loans are subject to the tax. The law further provides that no state court may enforce the provisions of a promissory note if the document tax is not paid.
We believe it would be a challenge to sustain a position that the Florida statute is preempted by ERISA. A failure to pay the tax, therefore, could mean that a 401(k) plan is extending loans that are not adequately secured, creating the potential for both prohibited transaction issues and plan operational failure issues.
The Florida statute arguably reaches not only plan loans extended to participants who are Florida residents but to plans with sponsors resident in Florida or third party administrators resident in Florida.
The Florida law does contemplate a process for paying past due taxes. The only other good news here is that no other state appears to have a similar transactional tax that would apply to plan loans.
Do you have more details on the logistics of the Florida loan document tax?
Thank you
You can find infomration about how to compute the Florida stamp tax, the process for paying the tax and the payment of the tax on a delinquent basis in Chapter 201 of the Florida Statutes. Additional information is on the Florida Department of Revenue’s website at http://www.myflorida.com/dor.
Interesting article. Could you provide more details as to why ERISA would not pre-empt the state law?
The Florida tax statue is one of general application not specifically targeting employee benefit plans. Other state tax statutes of general application have survived preemption recently. One example was a challenge to a California tax on unrelated business income.