Can a participant elect out of loan repayments?

[Guest Amanda Davis]

We have a loan provision in our 401k and when the participant endorses the loan check, they agree to pay the loan according to Plan provisions. Our practice (not outlined in the Plan beyond the fact that "the committee may adopt reasonable loan procedures") is to withhold monthly loan repayments via automatic payroll deductions.

Can an employee elect out of making these loan repayments? In this case, she is willing to accept the eventual default. In the past, our position is that an employee cannot elect out of loan repayments as long as they are receiving a regular paycheck.

Does the DOL have anything to say about this?

Thanks for your help.

[R. Butler]

There are a few prior threads out there on this. Attached is a link to one of them that I could find fairly quickly, but there are others.

http://www.benefitslink.com/boards/index.php?showtopic=10321

[mbozek]

While there is no explicit requirement that loans be repaid by payroll deduction, it is a better practice to require that the loans be repid by payroll deduction to avoid the administrative burdens for the plan administrator when the employee misses a payment or defaults. However the plan needs to have a provison requiring witholding by payroll deduction or have the payroll deduction provision in the note, preferably both places. Otherwise the employee can simply cease making payments at will which will create the inference that the loan was not bona fide at inception.

[QDROphile]

Plan loans are enforceable personal debts. If they are not, then they violate the loan rules. No matter what the reason fo failure to pay, the fiduciary has to act in a commercially reasonable manner with regard to collection. It is not commercially reasonable to allow someone to elect to quit paying or to break an arrangment that provides for payment. If the debtor has a legal right to break an arrangement (such a revoking a revocable payroll deduction authorization), the fiduciary has to consider other means of collection. When the loan is made in the first place, the fiduciary should consider what safeguards there are to prevent being put in the awful situation of pondering how to collect a loan.

[rcline46]

Also note that there is an obligation to determine if the person receiving the loan is able to repay the loan. If it is reasonable to assume they cannot handle the loan payments, then it is a fiduciary breach to issue the loan.

[RCK]

By endorsing the check, they are also accepting the terms of the Promissory Note. What does that say? Ours says that as long as they are on the payroll, payroll deductions must continiue.

RCK