Jump to content

401k loan reamortization


Guest wired

Recommended Posts

Guest wired

I left a company back in 3/2008 and had an open 401k loan at the time. The company never issued a distribution notice or 1099R and when I contacted Principal Financial (administrator), they told me the company still had me listed as an active employee & never reported my end of employment.

After a 28 month period, I returned to the company & they immediately started my loan payroll deduction for the same amount I had previously paid. When I looked up my plan on Principal's website, the loan payoff date had been extended to compensate for the time I was gone. Now, after being back with this company for close to a year, they reamortized my loan using the original payoff date, increasing my payroll deduction by over 325% (totaling over $920/mo). This was done with absolutely no notice to me.

I asked if they could allow me to continue paying the loan at the original rate & adjust the payoff date. They said they could not & my only option was to either pay the increased amount or default on the loan. Is it legal for them to do this?

Link to comment
Share on other sites

As noted in the post above, your loan should probably have been defaulted at the end of the quarter following your first missed loan payment (so about two years ago). The consequence of that would be you would have received a 1099-R and had to pay income tax on the outstanding balance at that time.

Moving past that, the longest repayment period allowed for a normal 401(k) loan is 5 years (you don't mention buying a residence w/ the loan so we'll ignore that separate time limit). Assuming you had a 5 year loan to begin with, if you'd stayed at the original payment then your loan term would have been nearly 7.5 years (with the 28 month break in the middle).

Question: was your break a result of military service? If so then that's another rule exception and I'd have to go look that one up to see how it would apply.

Another option is that you might be able to get a temporary loan from somewhere else (bank, credit union, family member) to pay off your outstanding balance and then take a new 401(k) loan (which you use to repay the temporary loan). This gives you a fresh 5-year term. The trick would be to ask "if I pay off my loan in full right now, could I then take a new loan for X dollars and how long would it take between payoff and when the new loan could be taken".

Kurt Vonnegut: 'To be is to do'-Socrates 'To do is to be'-Jean-Paul Sartre 'Do be do be do'-Frank Sinatra

Link to comment
Share on other sites

Unless there was a VCP filing for this loan, I think wired still has a potential problem. Rev. Proc. 2008-50 says that unless a VCP filing requests a change in the tax treatment, the loan is still taxable when it should have been defaulted. I would ask if the loan was corrected through a VCP (Voluntary Correction Program) filing with the IRS.

Rev. Proc 2008-50, Section 6.07 Rules relating to reporting plan loan failures. (1) General rule for loans. Unless correction is made in accordance with this section 6.07(2) or (3), a deemed distribution under § 72(p)(1) in connection with a failure relating to a loan to a participant made from a plan must be reported on Form 1099-R with respect to the affected participant and any applicable income tax withholding amount that was required to be paid in connection with the failure (see § 1.72(p)-1, Q&A-15) must be paid by the employer. As part of VCP, the deemed distribution may be reported on Form 1099-R with respect to the affected participant for the year of correction (instead of the year of the failure. The relief from reporting the participant's loan as a deemed distribution on Form 1099-R in the year of correction, as described in the preceding sentence, applies only if the Plan Sponsor specifically requests such relief.

(2) Special rules for loans. (a) In general. The correction methods set forth in section 6.07(2) (b) and © and section 6.07(3) are available for plan loans that do not comply with one or more requirements of § 72(p)(2) and are corrected through VCP. The correction methods described in section 6.07(2)(b) and © and section 6.07(3) are not available if the maximum period for repayment of the loan pursuant to § 72(p)(2)(B) has expired. The Service reserves the right to limit the use of the correction methods listed in section 6.07(2)(b) and © and section 6.07(3) to situations that it considers appropriate; for example, where the loan failure is caused by employer action. A deemed distribution corrected under section 6.07(2)(b) or © or under section 6.07(3) is not required to be reported on Form 1099-R and repayments made by correction under sections 6.07(2) and 6.07(3) do not result in the affected participant having additional basis in the plan for purposes of determining the tax treatment of subsequent distributions from the plan to the affected participant. The relief from reporting the participant's loan as a deemed distribution on Form 1099-R, as described in the preceding sentence, applies only if the Plan Sponsor specifically requests such relief and provides an explanation supporting the request.

Link to comment
Share on other sites

Create an account or sign in to comment

You need to be a member in order to leave a comment

Create an account

Sign up for a new account in our community. It's easy!

Register a new account

Sign in

Already have an account? Sign in here.

Sign In Now
×
×
  • Create New...