Does a terminated employee get the right to renegotiate a loan if the

[Bri]

Participant has taken a loan from her 401(k) for eighteen months, and is later terminated. Plan allows her to continue making repayments, rather than making the entire balance payable right then and there. Does it seem wise or practical to allow the participant to re-amortize the loan to spread out the payments, say, to the five year maximum, at a lower per payment amount? More importantly, since the plan allows active employees to do this, does it *have* to allow the ex-employee (who, rumor has it, may return to work for the employer in a few months) this option?

[MWeddell]

I've not seen any plans with this provision. If one allows the participant to renegotiate an existing loan, such as making lower payments but lengthening the amortization period, then one probably must remeet the DOL loan regulations (based on current interest rates, etc.) but it'll be subject to the original 5-year period under IRC 72(p). Sounds like a mess for any plan large enough to have the loan process automated.

If the plan does allow active employees to renegoatiate existing loans, it likely does not have to allow this to terminated employees. Given that most plans don't allow loans, even continued repayments on existing loans, to terminated employees and the IRS has not been insisting that this constitutes a "significant detriment" that violates employees' rights to decide whether or not to defer distribution under Reg. 1.411(a)-11, I doubt that ceasing to allow employees to renegoatiate loans is illegal either.