Stoppng payroll deduction loan repayment

[Guest]

Can a 401(k) loan program bar someone from discontinuing repayment of the loan by payroll deduction? Would state laws allowing people to stop payroll deductions at any time be preempted by ERISA? We have participants who want to stop the payroll deduction repayment of their loan even though it means they'll be taxed on the remaining loan balance

[Guest Connie]

I don't think you can do that.

Thought qualified plans have to operate their loan programs in the same manner as any other lender, which means that a loan would only be made with the expectation that it be repaid in full.

We take those loan payments as long as the employee is getting paid. And employees out on sick leave, etc., have to make their loan payments directly.

[MoJo]

I don't think I agree. State law is only preempted by ERISA to the extent that it is inconsistent with ERISA. I see nothing in federal law which mandates continued withholding for loan repayment (indeed, loans need not be repaid with payroll deduct at all...). Negative enrollment is another area where "forced" withholding (for deferral purposes) is an issue. I understand that litigation is on-going on that issue.

[Guest]

Thanks for your responses. We fully expect the loans to be repaid when made, but sometimes people take out too many, and want to stop the payroll deduction a year or two later. I wondered if we could write it into the loan doc that you can't stop payroll deduction while your still employed, or would the state labor laws which allow someone to stop any payroll deductions would still apply.

[Kirk Maldonado]

The DOL has issued an advisory opinion right on point that these state laws are preempted.

[MoJo]

Do you have a cite for that DOL advisory?