Can participant simply choose to stop making repayments on loan from plan?

[Guest rocnrols2]

A participant in a 401(k) plan claims that she cannot afford to continue repaying her plan loan. If the plan allows her to stop repaying the loan, short of a court order, does the violate the requirement that plan loans be provided under a legally enforceable agreement between the plan and the participant?

[Lori Foresz]

Hi,

We have been told that in the state of California, participants can elect to stop the witholding since California is a state that requires the participant's consent to withhold. I have a slight problem with this approach, since it could be used as a way to get money out of a plan that would otherwise prohibit a withdrawal. However, we have done it and will continue to allow participants to instruct re-payments to stop. I would be curious to hear what others say.

[david rigby]

Sounds like a loan in default. Then look to the plan document to see what happens next.

[Harwood]

I agree with Lgolden. In California, we try to convince the Participant of the problems they will face when their loan goes into default, such as state and federal taxes [often including additional taxes for premature distribution] and the inability to get another plan loan in the future.

If employee insists on stopping deductions, we will comply. Irrevocable elections are not permitted by California law. The DOL has not ruled on the issue; this does not seem to be an issue of ERISA-preemption.

[QDROphile]

The fiduciary has to consider suing to enforce the obligation and collecting from any source available, such as garnishment or levy on other assets. However, the fiduciary usually comes to the conclusion that the effort to collect means throwing good money after bad, so it is prudent not to go after the participant outside the plan.