Loan Default???

[Guest CHRISTA]

A per diem employee took a loan from their 401(k) plan. The employee does not work consistently and is unable to make the loan repayments. She has not made any loan repayments yet. I was thinking of putting the loan into default (which is what the employee would like) but is this ok??? It seems like the employee never planned on paying the loan back and wanted an in-service withdrawal, which isn't allowed per the plan document. What should I do???

[Guest Jennifer Reid]

You must default the loan and treat it as a deemed distribution after the last day of the calendar quarter following the calendar quarter during which the last payment was made (or sooner depending on your plan's loan policy). You should also amend your plan's loan policy (to avoid this happening again) by providing that loans will not be made to anyone who has defaulted on a prior loan from the plan.

[QDROphile]

You may have a breach of fiduciary duty. Loans should not be made to persons unless the lender reasonably expects the loan to be paid. If repayment is only through payroll deduction, it is rather dicey to conclude that a per diem employee will pay the loan. Perhaps the loan is OK if the employee has a long history of regular per diem pay that would support the loan. Or perhaps the fiduciary did a thorough asset, credit and cash flow analysis and expected to be paid from other sources if employer compensation was insufficient.