Unusual 401k Loan Issue

[Guest dskmh]

Hi,

I have a rather unusual problem I was hoping to get some thoughts on. I recently requested and received a loan check from the plan of employer that I had left several years before. The reason this was possible is because the former employer had never changed my status with Fidelity to indicate that I was no longer an active employee. Therefore, I was able to take a loan but have no way to pay it back. In addition, the vesting had been continuing so they ended up removing 50% of the company match from my account when I called to inform them of my predicament. I asked Fidelity if I could just return the check and they said no and that I would have to take it up the issue with my former employer.

At this point am I correct in my assumption that I will just have to take this as an early distribution and pay the penalties? My ultimate preference would be to get the money back in my account somehow.

Thank you.

[JanetM]

Can you request a lump sum payoff amount and send the funds back to the plan? May cost you bit in interest - but if you don't pay off the loan will default.

[R. Butler]

There may be other other issues, but along the same lines as JanetM was suggesting why can't you just pay it back? It seems from your post that you still have the check & since you still have the check I am guessing that its a new loan & probably not currently in default.

How long ago did you take the loan? Is it already in default and beyond the cure period? Do you still have the check?

[Appleby]

Assuming the loan is not in default, you could-

1) Have the loan payments deducted from your regular checking account or

2) Use Fidelity’s online auto-debit loan payment system to make a onetime payment of the full amount from your checking account

These two options are inline line with the suggestions above

Or

3) request a total distribution of your plan balance, with the amount representing the loan being treated as an offset. Have the eligible rollover amount (excluding the loan balance) processed as a direct rollover to your IRA or other eligible retirement plan. The loan balance…treated as an offset, would be rollover eligible…therefore, you could use the funds you receive for the loan as a rollover contribution to your IRA or other eligible retirement plan.

Of course, consideration should be given as to whether you want your assets to leave the qualified plan environment and go to an IRA environment.

[Guest dskmh]

I still have the funds but was told by Fidelity that I should cash the check as there is no way for them to take it back. They also indicated that my former employer would need to setup a repayment method but they are not willing to do so.

I believe taking a total distribution and paying back the loan amount as an offset would be a very good option for me. Is the time limit for that set by the plan documentation? I am concerned that they might make my repayment date retroactive to when I left the company 3 years ago as they did with the company matching funds. So they may already consider the loan in default though I have not been told that. I received the funds in July.

I realize that my question was likely off-topic for this message board and so I truly appreciate the responses.

[R. Butler]

I am concerned that they might make my repayment date retroactive to when I left the company 3 years ago as they did with the company matching funds. So they may already consider the loan in default though I have not been told that. I received the funds in July.

They can't make a repayment date retroactive to a date before the loan existed. You should have completed loan paperwork which tells you when repayments are supposed begin.

Hypothetically, I suppose they could have already treated this as a deemed distribution, but I doubt it. You can do as Appleby suggests in option #3. I would get that ball rolling ASAP & I would also check your loan papers or get a copy of the loan document & find out what events constitute default & when a deemed distribution occurs. You want to make sure this is taken care of before there is a deemed distribution.

[Guest death and taxes]

QUOTE: "I still have the funds but was told by Fidelity that I should cash the check as there is no way for them to take it back. They also indicated that my former employer would need to setup a repayment method but they are not willing to do so."

The idea that Fidelity has no way to take it back is ridiculous. They are just being difficult to deal with. You should be able to send back the check and they should be able to redeposit that check to your account and repay the loan. I'm wondering, what do they do with uncashed checks? Many plans have a provision that indicates unclaimed benefits be redeposited to the trust.

If all else fails, just cash the check and send in a payment for the entire amount. It is your Plan Sponsor's fiduciary duty to process since they ultimately allowed the loan. I'm sure they don't want to deal with a breach of fiduciary duty.

[Guest Pensions in Paradise]

Don't cash the check yet. Look on the front & back of the check and see if there is anything written on it regarding loan terms or something like "by cashing this check you agree to the terms of the loan that were previously provided to you". I've never dealt with Fidelity loans, but they may have implemented a "paperless" loan procedure in which your act of cashing the check is treated as your acceptance of the loan terms. If that's the case, you can't be treated as taking the loan if you don't cash the check.

If there's nothing on the check, then you must have signed loan paperwork. Review that to see what it says about loan repayments and defaults.