Loan Payment Suspension While On Maternity Leave

[Guest ChopperPilot]

Can a participant take a loan from her 401(k) plan knowing she'll be going on maternity leave in a month. She plans to be out on maternity leave for 3 - 4 months and then she plans to return to that employer. Are there special provisions regarding participants on maternity leave so that the loan will not be defaulted upon?

[FundeK]

Isn't maternity leave considered a leave of absence? If so, and your plan allows a participant to suspend during a leave of absence, then this participant should be able to suspend. Of course, she will be required to make up the missed payments when she returns. Also, the leave must be without pay. So, if she is receiving pay while out (that is at least the loan payment amount) she has to continue payments.

Does that help?

[Brian Gallagher]

FundeK,

That would be regular salary right, not disability pay (something like 66% of regular pay)? For some reason maternity leave is considered short-term disability in most cases (don't get me started on that!).

[Belgarath]

It's also possible that the plan allows a "cure period." Depending upon the dates when the payment is due, and depending upon whether it is a quarterly payment, etc., it is possible that she'll be back to work well befor the cure period expires.

For example - she takes a loan on August 30, 2004, quarterly repayment with first payment due on November 30, plan utilizes maximum cure period allowed by the regulation (1.72(p)-1) so it would end on March 31, 2005. She might easily be out 3-4 months and return in plenty of time to make this up with no difficulty.

[Brian Gallagher]

Also,

In our standard loan program, the participant has the option of either repaying the missed payments or, when she comes back, to re-amortize the loan for the time remaining.