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rehire of terminated employee w/ distribution and loan


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My client has an employee who took a loan in April then terminated and moved away. He never made any payments on the loan. He took a distribution and his distribution was offset by the loan. He has now moved back and been reemployed. What are his options on repaying the loan now? If he repays his distribution, could he have the loan restored and resume payments? Would he have to repay the distribution in order to resume the loan? I can't find any information about this in the plan's document.

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As I understand the restoration rules, he must restore all that he was paid to get back any forfeited money. I interpret that rule as saying to restore the loan amount also. Remember he DID receive distribution of the loan, so as far as the plan is concerned the loan is paid off.

If he pays everything back, then depending on the amounts and the loan rules for the plan, he may be able to take a new loan.

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Check the plan document for the repayment provisions. If there were deferrals included in the distribution, he may not have to repay the entire distribution. Our GUST prototypes require repayment of the portion of the distribution attributable to employer contributions to get the employer accounts restored.

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If the loan was offset, then I believe that is irrevocable and cannot be reinstated. If less than 60 days elapsed since the date of distribution, then I think he could do a rollover of that amount back to the plan, but in cash only.

If restoration of forfeited amounts is an issue, then I agree with rcline that he has to pay it all back, including the loan amount (in cash). He might indeed be able to take a new loan, but that doesn't stop the old loan offset that already happened.

Ed Snyder

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I am not here to opine whether or not the loan can be restored just to say even if it could, it wouldn't erase the tax consequences of him receiving his distribution. Therefore, what is the purpose? I seriously doubt the participant wants to restore a loan just to create basis. Too his loan limits aren't affected since it's an actual distribution and not a deemed distribution.

"What's in the big salad?"

"Big lettuce, big carrots, tomatoes like volleyballs."

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