401(k) - Loan Default

[waid10]

We have an employee who has a loan through our 401(k) and is making payments via payroll deduction. She is experiencing financial hardship and would like to stop repayment of the loan. What are the consequences for this action? I know it is in default for her and it is treated like a distribution. Are there any consequences for the plan? How should this process work?

Thanks.

[oriecat]

Does your SPD even allow people to request to stop their loan payments?

[waid10]

Does your SPD even allow people to request to stop their loan payments?

No, the SPD does not say this is permissible.

[Guest Sieve]

Even though state law may permit an individual to eliminate payroll deduction at any time, doing so may cause the administrator to violate the terms of the plan if the plan requires payroll deduction loan repayments. Seems like the horns of a dilemma, to me.

If the plan does not require payroll deduction loan repayments--and perhaps even if it does--then I don't think you can refuse a participant's valid request, pursuant to state wage laws, to cease payroll deductions. You simply then have a loan default if payments aren't made regularly pursuant to the terms of the loan documents--and, eventually, a deemed distribution.

[masteff]

The ability of a participant to request that loan deductions be stopped has been debated some on this forum with no definite conclusion.

Other than some abiguity on the actually stopping of the deductions and what might result from that, the plan has no other consequences.

You could search the forum using the words: loan default state law (put a + in front of each to only find threads w/ each word).