Loan Default

[Guest benefitsanalyst]

An employee's loan was recently defaulted and they received a statement in the mail stating the tax implications. The employee is now telling us that he never received any notification that this was going to happen and would like the opportunity to pay it back in full.

Besides the fact that the loan promissory note and the SPD state that the loan will default if no payment is made for 90 days after termination, is it ok to reverse the defaulted transaction and allow the employee to repay it? If so, what will happen if it comes up in a DOL audit?

[Guest David M. Lipkin]

It sounds like you are tip-toeing between the practical and the correct answer.

Practically, most of our clients would take a lenient approach and allow the later repayment. It seems morally acceptable, no one is harmed, it is unlikely to ever be picked up, etc.

It sounds like you already know the "correct" answer, which is probably to default it. We usually leave it up to our clinets which path to follow.

Good luck!

David