Loans

[Jilliandiz]

Participant takes a loan from her 401(k) Plan, but while that loan is outstanding the plan terminates...what happens to the loan?

[Guest ElizabethMae]

I don't know specs on your plan , but in our plan -safe harbor- account contributions/deferrals are made through payroll so in the event of an employer's termination of participation the loan is then considered as income from an early distribution -with the applicable income/earlywithdrawal taxes. This is because the employe can't continue to make repayments once the employer has left the plan. (since the ee can't take more than 1/2 and no more than 50k as a loan it's not like the ee continues to owe their acct, the remaining balance on the loan is considered an early distribution etc).

Some links that might help are: http://www.nagdca.org/resource/nagdca_notes/notes03-03.pdf (info on loans from Def. Cont. plans)

http://www.401khelpcenter.com/loans.html helpful info on basics and pros/cons for participants)

http://www.irs.gov (language from IRS.Gov)

"If you default on a loan from your 401(k) plan, you are considered to have received a distribution from your 401(k) plan. Whether or not you will have to pay the 10 percent additional tax on early distributions from 401(k) plan depends on a number of factors, including your age. "