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Participant Loan - Military Leave of Absence


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Participant in a 401(k) Plan takes a participant loan and then goes on military leave.  The participant subsequently has a termination of employment from the employer who sponsors the 401(k) plan from which the participant loan was taken.  Per 414(u)(4), the plan may suspend the obligation to repay the loan during which the employee is performing service in the uniformed services.  Loan policy does not permit terminated participants to make ACH payments, allows participants to suspend payments during military leave, and upon termination loan is due payable unless part of eligible rollover distribution.

Question - What happens if this participant terminates employment while on military LOA with an outstanding loan?

A. Participant may still suspend the obligation to repay for the period of the military service.  Once military service ends, the participant would then fall under the normal rules for a terminated participant with an outstanding loan.  (FYI loan policy states upon termination loan is due payable unless part of an eligible rollover to another plan), OR

B. Participant is treated as a terminated employee and by the terms of the plan, the loan would be due payable unless part of an eligible rollover to another plan.

“(b) Military service. In accordance with section 414(u)(4), if a plan suspends the obligation to repay a loan made to an employee from the plan for any part of a period during which the employee is performing service in the uniformed services (as defined in 38 U.S.C. chapter 43), whether or not qualified military service, such suspension shall not be taken into account for purposes of section 72(p) or this section. Thus, if a plan suspends loan repayments for any part of a period during which the employee is performing military service described in the preceding sentence, such suspension shall not cause the loan to be deemed distributed even if the suspension exceeds one year and even if the term of the loan is extended. However, the loan will not satisfy the repayment term requirement of section 72(p)(2)(B) and the level amortization requirement of section 72(p)(2)(C) unless loan repayments resume upon the completion of such period of military service and the loan is repaid thereafter by amortization in substantially level installments over a period that ends not later than the latest permissible term of the loan.” 

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I respectfully am not sure what the question is.  I see there is a question in bold, but it appears you proceed to then answer it or maybe you are providing options a and b?  I think you treat the participant like you do any terminated employee.  I understand the facts to be that he was still employed while on military duty with an outstanding loan.  His loan payments were appropriately suspended at that time (interest should have continued to accrue not to exceed 6%) and  then he subsequently terminated.  I’m not sure if he has returned from active duty and then terminated or why he was terminated.  However, if truly terminated then have to following the loan program for terminated employees . 

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It could depend to some extent on what the loan policy says. Ours would typically (unless plan wanted something else) suspend payments until end of period of active service, regardless of what the employer considers the service member's employment status to be. If after the end of the period of active service the employee takes a different job or allows his/her reemployment rights to lapse, you would then look to your loan policy to see whether the loan was accelerated or the former employee could continue to make payments. The period of suspension during active service would not be considered to have used up any of the 5-year repayment period.

Luke Bailey

Senior Counsel

Clark Hill PLC

214-651-4572 (O) | LBailey@clarkhill.com

2600 Dallas Parkway Suite 600

Frisco, TX 75034

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