Council asked to allow employee loans from town's 457(b) deferred-comp plan

Keystone's finance director told the council staff is recommending employees be permitted to borrow from the town's 457(b) deferred-compensation plan while preserving the 401(a) as a non-borrowable social-security-replacement account.

At the June 17 work session, Finance Director Hiky Fox said municipalities commonly permit loans from deferred-comp plans and summarized the proposed guardrails: borrowers could take up to 50% of their vested balance with a minimum loan of $2,500 and a maximum of $50,000; repayments would be made via payroll deduction; and, if an employee separates from the town, the outstanding loan balance would generally be due and payable (employees often satisfy the debt by withdrawing the borrowed portion of their account).

"When they do borrow against it, it's . . . they can only borrow 50% of what they have vested. Minimum of 2500, maximum of 50,000," Hiky Fox said.

Council members asked whether there are protections if an employee is involuntarily separated and cannot repay; Fox said the loan is secured by the 457(b) asset and that tax consequences for early withdrawal would apply in some circumstances. Council member Carol Kerr said the plan appears to have "a lot of guard rails" and expressed comfort with the safeguards described.

Staff did not propose immediate implementation at the work session but asked council to consider returning the item for formal action; staff said they would propose specific policy language and ensure the plan administrator's rules align with council direction.