Bethany S

Here is what outside counsel provided to us. ************************************************************************************************************************************************************************ As I previously noted, payroll practices and procedures are generally considered by the IRS to be matters of state law and deducting from an employee’s paycheck against his or her will in violation of state law is a bigger issue than allowing this loan to default. Accordingly, I took a look at California’s Labor Code, which provides, in pertinent part, as follows: It shall be unlawful for any employer to collect or receive from an employee any part of wages theretofore paid by said employer to said employee. (Cal. Lab. Code § 221) The provisions of Sections 221, 222 and 223 shall in no way make it unlawful for an employer to withhold or divert any portion of an employee's wages when the employer is required or empowered so to do by state or federal law or when a deduction is expressly authorized in writing by the employee to cover insurance premiums, hospital or medical dues, or other deductions not amounting to a rebate or deduction from the standard wage arrived at by collective bargaining or pursuant to wage agreement or statute, or when a deduction to cover health and welfare or pension plan contributions is expressly authorized by a collective bargaining or wage agreement. (Cal. Lab. Code § 224) Since federal law does not require that employers withhold from participants’ paychecks in order to repay a plan loan, such withholdings seem to be authorized in California as “other deductions” “expressly authorized in writing by the employee.” By requesting that you cease loan repayments from his paychecks, we think that the employee has rescinded his express authorization and that your failure to follow his instructions may violate California law.

Worried about setting some sort of precedence where we establish that people can take a loan and voluntarily default when they get tired of paying. Our Plan document is silent on this situation since it's a pretty rare occurrence.

Yes, the employee is eligible for an in-service withdrawal.

Good afternoon, We have an employee who is looking to voluntarily default on his $50k loan that he initiated in 2018. He's paid back about $15k but now says the payments are too much and he'd like to stop payments and have the remaining amount defaulted and treated as a deemed distribution. The employee is still contributing to the 401(k) and receiving match. He also has about $12k he can take as a distribution. The participant is 67 years old. We've talked to our general counsel and they've informed us that we should allow the voluntary default because the employee resides in California. The IRS doesn't seem to keen on allowing employees the opportunity to circumvent the law. Has anyone heard of this?