New York City Police Pension Fund

Tier 2 - Loan Services

Overview

  • Loans with a repayment schedule of five years (130 payments) or less are treated as separate loans for purposes of repayment, tax liability and tracking.
  • Loans being repaid with a term of five years or more will be combined, resulting in a single repayment on the combined loan.
  • The minimum repayment on new loans is 2% of the member’s bi-weekly gross salary. If a member takes out more than one loan, each loan is subject to the minimum 2% periodic repayment.
  • Members are limited to holding 10 outstanding loans at one time. No more than two new loans may be granted during any 12-month period.
  • Existing loans will not be combined with any new loans and will continue with the minimum repayment at the time the loan was originally granted.
  • Taxability calculation methodology for pension loans is unchanged.
  • Outstanding principal is defined as the total outstanding loan principal for all active loans, including NYC Deferred Compensation Plan (DCP) loans, if any.
  • A member may borrow up to 90% of his/her accumulated contributions, assuming minimum uniformed service of three years. The annual interest charged on unpaid loan balances is currently 4%.

Why Pension Loans Cause Shortages
When you take a pension loan, you cause a shortage in your Annuity Savings Fund (ASF) account. That’s because the funds borrowed were earning 8.25% interest in the account, but you pay the loan back at 4.0% interest, which is 4.25 percentage points lower than what the borrowed funds would have earned had they remained in your account. Making regular pension contributions during the loan repayment period, or even fully repaying the loan, does not prevent the shortage from occurring.

Note: The Police Pension Fund recommends that members carefully evaluate whether taking a pension loan is the best option.

If the member’s ASF account has fallen below the level required to obtain full Service Retirement pension benefits, that account is deemed to have a shortage. If not repaid, a shortage will reduce the member’s pension.

Loan Repayment and Insurance
You may repay your loan in full or in part at any time (minimum partial payment is $500).
In addition, you may change your loan payment amount only during the months of May and November.
If you die before retirement, loans with a combined balance up to $25,000 are insured, subject to how long each loan has been outstanding, as follows:

                           Days Loan Outstanding                           % of Loan Insured 
                                  Less than 30 days                                               0%
                                       30-59 days                                                    25% 
                                      60– 89 days                                                   50%
                                  90 days and longer                                            100%

Loan Taxability                   

A pension loan will be taxed when the member borrows taxable contributions (i.e., 414H contributions made after 12/01/1989) and:

  • For members with 10 years or more of uniformed service:
         
    - The loan principal is greater than $50,000; or
         
    - The term of repayment exceeds five years.
  • For members with over three years but under 10 years of uniformed service:
    - The loan exceeds the greater of 50% of accumulated deductions or $10,000; or
    - The term of repayment exceeds five years.
  • The taxable portion of a loan is the portion of the principal consisting of untaxed contributions and associated interest. A member under the age of 59 1/2 will incur an additional 10% penalty on the taxable loan amount. 
  • If you borrow previously taxed contributions, the loan is not considered a taxable distribution and is therefore not subject to the maximum five-year repayment term above. Previously taxed contributions include 50% Additional contributions and contributions made before December 1, 1989.

  Form 1099-R Address:  If you borrow taxable contributions, PPF must issue IRS Form 1099-R. We will send your 1099-R to the address listed on your loan application unless you request an address change in writing to: The New York City Police Pension fund, 233 Broadway, New York, NY 10279 (attention: Loan Services Unit.)

    Example:  A member with an outstanding loan of $34,997 (Loan 1) requests a new loan (Loan 2) of $15,000 to be repaid in five years with 130 payments of $127.15. These loans may not be combined.  When the member starts to repay Loan 2, he/she will now have two outstanding loans and will be making the following payments each pay period:   

                                  Payment     Number of Payments     Current Principal
                     Loan 1    $135.98           326                                 $34,997
                     Loan 2    $127.15           130                                  $15,000

Deferred Compensation Plan Loans
The NYC Deferred Compensation Loan Program (DCLP) works in conjunction with loans taken at the Police Pension Fund. The maximum DCLP loan is the lesser of:  a) 50% of a participant’s DCP account balance; or b) $50,000, reduced by the highest outstanding principal at the Police Pension Fund during the 12-month period ending on the date of the proposed DCLP loan.

Police Pension fund members seeking a DCP loan must have the Police Pension Fund certify their highest outstanding PPF loan balance during the above period. NYC Deferred Compensation will not issue a loan if the combined PPF/DCP loan balance exceeds the $50,000 DCLP maximum. (For more information visit www/nyc.gov/nycppf. Click the Loan Services link; then click the Deferred Compensation Loans link.)

Principal Residence Exception

Ordinarily, a pension loan must be repaid within five years to avoid tax consequences. 

However, IRS Code 72 (p) (2) (B) (ii) provides an exception to this rule. When a member takes a taxable pension loan in order to purchase a principal residence, the IRS permits the member to defer taxes on that loan if certain conditions are met. 

To take advantage of this exception, the member must establish to the satisfaction of the IRS that he/she applied the loan toward the purchase of a principal residence.

The maximum residence loan exception amount is $50,000 per member. If both spouses are uniformed members of service, each spouse may claim the $50,000 amount.

This exception is not available to members of the service who are in the process of retiring.  

The Police Pension Fund does not provide tax counsel. It is the member’s responsibility to comply with the terms of IRS Code 72 (p) (2) (B) (ii). It is therefore recommended that members consult with a tax professional prior to taking advantage of this exception.

Taxable Loan Final Withdrawal at Retirement
If a member takes a pension loan using taxable funds within five years of retirement and fully repays it by his/her retirement date, that loan will not be taxed. However, any unpaid taxable loan balance at retirement is considered a taxable plan distribution and may create or increase a shortage. If the member with an unpaid taxable loan balance at retirement is under 50 years old, he/she will incur a 10% early withdrawal penalty. To avoid taxes and the penalty, the member may roll this loan over to an IRA or other qualified retirement plan within 60 days of retirement.

A member may elect to withdraw up to 90% of his/her required amount at retirement. This is called the final withdrawal (sometimes called the “final loan”). The final withdrawal can consist of both taxable and/or non-taxable funds. The final withdrawal will also create a shortage. As with the above loan, the taxable portion of a final withdrawal must be rolled over to an IRA or other qualified retirement plan within 60 days of its issuance to avoid taxation and a possible early withdrawal penalty.

At retirement, the Police Pension Fund provides every retiree with the tax-free/taxable breakdown of their ASF contributions as well as the tax-free/taxable composition of the final withdrawal and any outstanding pension loans, as applicable.