Terminated Participant With Outstanding Loan

[Guest 4:15 Limit]

Participant in a 401(k) profit sharing plan (with participant-directed investments) terminates employment and has an outstanding loan. All loan payments are current through termination date. Loan document states that loan repayments are made via payroll deduction.

Of course, when the employee terminates, they no longer have the ability to make loan repayments via payroll deduction.

Is the plan sponsor required to permit continued loan repayments after termination of employment (e.g., via personal check) or is this left to the discretion of the plan sponsor? The plan document does not address this issue.

Any input on this would be greatly appreciated.

Thanks!

[J Simmons]

If as you say the plan document is silent, I think that the ER would need to allow the term'd EE to make periodic payments over the remainder of the loan repayment schedule. Granted, payroll withholding is required--but now there's no payroll to withhold from. So that provision is now a nullity.

If the term'd EE makes the payments on time, the loan would not be in default due to late payments. So what provision of the applicable documents would allow for acceleration?

[Kevin C]

The terms of the loan program might not be included inside the plan document. Our documents and Reg 2550.408b-1(d) allow a separate written loan policy. If your plan does the same, the information you are looking for should be in the written loan policy.

[R. Butler]

Does the loan program state that loans will become fully due & payable on the occurence of a distributable event? Most plans thta I have seen requiring payroll deduction also include the fully due & payable provision.