Got Loans?

Linda Visconti, QKA 

Retirement Plan Administrator

If your plan, like many of the plans we administer here, has loan provisions - you know how much participants love to utilize this feature.

It is your responsibility as the plan sponsor to make sure the loan payments are withheld timely in accordance with the schedule and continue until the loan is paid in full. But what happens when someone goes out on a leave of absence? Your plan document should specify if loan payments can be suspended while a participant is out on leave. However, even if they are suspended, those missing loan payments must be made up upon the participant returning to work!

It’s tough to be out on a leave, and then return to a big payment due on the loan, which is why we sometimes recommend having the employer double or triple the usual loan payments for a period until the payments catch up to the schedule. When no attempt is made to make up payments, or pay off missing payments in full, there are consequences. The participant who took the loan signed a promissory note and is obligated to repay the funds to the plan. If they refuse, or if the plan sponsor neglects to restart the payments, it is the responsibility of the participant to speak up and get back on track with the payments. Failing to do so means the recordkeeper will “deem” the loan. This means that the outstanding balance due on the loan is now taxable income to the participant and a 1099-R will be generated to report the income to the IRS.

And guess what? The loan still needs to be repaid even after it is deemed! That loan will sit on the plan books until it is ultimately paid off in full. There is no escaping paying back the loan. Even though the participant is borrowing from themselves and paying themselves back in interest, the plan must account for all plan assets and this includes participant loans. Please note, if your plan limits participants to one loan, this deemed loan counts and that participant cannot borrow money from the Plan until the deemed loan is satisfied (i.e., paid in full)

Participants should always think carefully prior to pulling funds from their retirement plan, even as a loan they will repay. If you have a participant considering a loan, for whatever reason, there may be alternatives to drawing the funds from the plan. If their need is short term, perhaps just lowering or stopping the deferrals to the plan would help. That is always an option in most of the plans we administer. Borrowing, from a bank or from your retirement plan, should be deliberated carefully and not made without thought to the future. Speaking with the Plan’s Financial Advisor may help the participant with alternatives to consider.

Yes, it is their money, and sometimes it is good to have and utilize the loan option. Just make sure they have thought carefully about it before signing off on the paperwork requiring deductions from their paycheck for as long as five years. As the Sponsor, it is also your Plan and you must ensure it is managed properly.

Please give us a call at 610-251-0670 if you have any questions!