401(k) Loan Repayments as "pre-tax"?
Posted 30 June 2004 - 03:16 PM
Posted 30 June 2004 - 03:39 PM
Posted 30 June 2004 - 03:51 PM
Assume that a participant takes a loan from a 401(k) plan (no after tax dollars) and repays via payroll deduction. There is no provision to exempt loan repayments from withholding. Thus, the repayments are made from after tax dollars into a pre tax account and will be taxed a second time at distribution. In a sense they become pre tax without the benefit of an exemption from payroll taxes.
It's not stated, just inherent in the regs, the IRS is fully aware of it, their response has been "Too bad, so sad!".
Posted 30 June 2004 - 04:17 PM
Posted 30 June 2004 - 05:05 PM
My time to retirement affordability just got cut back from years to months.
Posted 01 July 2004 - 10:52 AM
My annual compensation is 50,000. I borrow 50,000 from the plan (a nontaxable event). I now pay back the 50,000 out of my compensation. Under their theory, I have reduced my taxable income to zero. Note that nothing has changed in the plan (it is back to whole with no loan outstanding), and I now have 50,000 cash in hand instead of my after-tax amount of the 50,000 compensation. I've transformed my entire income into nontaxable income and owe no tax.
Posted 01 July 2004 - 04:48 PM
This employee has elected to defer $200 per month. The employee has a balance of $50,000 from which he/she borrows $10,000 (or whatever amount).
What stops this employee from "directing" the salary reduction of $200 towards loan repayment?
If this employee is allowed to "direct" the application of the salary reduction to loan repayment, it is in reality repayment with pre-tax $.
The questions are, Can the employee "direct" the salary reduction? Is this prohibited by the Plan Document? If the PD is silent, What stops the employee from doing this?
Other than being able to "direct" the application of the salary reduction, Could this employee transfer amounts within the overall account, anyhow? If internal transfers can be made, the employee could accomplish the same repayment with pre-tax $ by such a transfer.
How would the record keeper even know what was being done?
Cost Reduction Strategies
Burns and Associates, Inc
Posted 01 July 2004 - 05:21 PM
A recordkeeper could be given incorrect information and he would never know. Until the census report reflects a deferral (pre-tax) and all the record keeper saw was loan repayments (after-tax).
Posted 01 July 2004 - 05:28 PM
I like MGB's summary: preposterous.