401k loan

[Guest deidre.1@earthlink.net]

My husband took out a loan on his 401k...am I considered legally responsible for that loan? I don't remember ever signing anything to do with this loan.

[actuarysmith]

If your husband defaults on the loan (i.e. fails to make repayments timely), it will be considered a taxable distribution.

He will receive a form 1099R showing the amount of the distribution and it will be included in his taxable income for the year.

If you are married and filing jointly, I suppose it will affect your taxes too...........

[Guest deidre.1@earthlink.net]

ok so, can that company check my credit routinely? Even if we have not defaulted on the loan? That is what they are doing and using the excuse of this 401k loan from my husbands 401k

[actuarysmith]

without knowing something about your 401k provider (like who it is) it is a little hard to answer your question.

However, the loan regs only allow a person to borrow up to 50% of their account balance. In theory, the half the balance remains in the plan as "collateral" for the loan.

I can think of no reason why they would be routinely checking your credit, especially if you have made all payments on time.

Is this one of those credit card 401K loans?

[E as in ERISA]

I have seen someone write a loan policy that provides for acceleration of the loan if the person's financial condition becomes bad (obviously including bankruptcy, but also a lot of other factors). That might justify the company to monitor the person's financial status. I don't think that is required by IRC or ERISA. But I don't know that it is prohibited either.

[mbozek]

Under the Federal Fair Credit Reporting Act a lender cannot check a borrower's credit records without the borrowers's written consent. A spouse does not normally sign an application for a loan from a 401(k) plan although some plan administrators make the spouse sign the loan application/agreement even where not required by law. Check with the agency that keeps your credit history (e.g., equifax, TRW) to see if your credit records have been checked recently. Second any monitoring of credit records should be spelled out in the loan agreement that your husband signed.

Katherine: Can you tell me why a plan would want to accelerate a loan repayment if the ee's credit becomes bad ( Or how would the plan set standards for determining poor credit?). Accelerating the loan will only increase the probability that the participant will be forced to declare bankruptcy in which case the loan goes into default. If the plan provides for repayment through payroll deduction why whould the PA need monitor the credit status of the participant.

[E as in ERISA]

I don't that a plan should accelerate a loan based on bad credit. But I have seen loan policies drafted that way (I assumed that the author used a commercial loan policy, or something like that in order to draft the terms). I advised that is not common language for a loan policy.