Repayment by payroll deductions for a participant who terminated emplo

[smm]

Former employee has an outstanding participant loan. Promissory note states that loan shall be repaid via payroll deductions. Loan is silent re. what happens when a participant terminates employment. Loan policy states that repayments must be made by payroll deductions. Loan policy similarly silent re. terminated participants. Plan document states that loans will be made to participants and beneficiaries on a reasonably equivalent basis. Any ideas on whether the plan can/must allow the terminated employee to make repayments, or whether the plan can/must call the loan and demand payment in full, now that participant is no longer employed.

[mbozek]

The question is not whether the plan admin can continue the loan repayment after termination but why would plan admin want to be involved in such a headache. Employee can repay the loan before default occurs or can rollover the loan to an new employer's plan instead. Accepting loan repayments from the part is a real hassle because someone has to deposit each check to the plan and make sure it gets to part. account. If part defaluts then the plan has to go through default procedure which is administratively burdensome. Also if you do it for one person then you mustl do it for all terminated participants with loans. PA can rely on language of note requiring repayment by salary deduction.

[smm]

I agree that it is a hassle, and no one wants to do it. However, my only concern was whether the "payroll" language is sufficient to require that the loan be repaid in full when the terms of the note do not specifically say that the loan is due and payable in full at termination.

[Guest Therese]

Requiring immediate repayment seems like a reasonable interpretation - no payroll, no periodic payments - though I suppose the participant could dispute it. Obviously the loan forms for future loans, the loan policy and the spd should be revised to include more specific language.

[Guest hpaine]

If the written loan program (which is required for every DC plan) states that the loan payments MUST come from payroll deductions, then that language is all that is needed. The participant does have the option to roll the outstanding loan balance to the new administrator, however, in my experience, most admins do not want to take on another loan already in repayment mode. His only other options would be to take the unpaid balance as a distributable event and would pay normal taxes on the balance or pay the entire balance off.

[mbozek]

participant could elect to pay off loan from another source, e.g., home equity loan or if the balance/interest rate is not to high, from a credit card or participant's spouse could take out a plan loan.

[RTK]

Regarding relying on provision for loan payment by payroll deductions as permitting acceleration of loan repayment upon termination of employment, what would happen if there was period where participant was employed but without any pay or with insufficient pay to make loan repayments (e.g. layoff, leave)? Would loan repayment be similarly required?

[Guest hpaine]

If the participant has been laid off, technically that would be considered a seperation from employment at which time s/he would be given the options of paying the loan off in its entirety or take the unpaid balance as a distributable event, in which case taxes would be applicable. (Usually the mandatory 20% + any state and local taxes).

Now, if the EE is still employed, but financially unable to pay the loan (a payment has to be made at least quarterly), he has the option of putting the loan in default and being 1099'd on the balance.

In short, if the participant is still employed by the company that issued the loan, the responsibility is there to continue loan payments, regardless of financial situation.

I have seen situations where the employer will "front" the money to the participant to continue making the loan payments. (Not the best case scenario however & is usually done by smaller employers that want to help their employees)