Refund needed but participant took 401(k) loan

[fiona1]

What happens if a participant is due a 415 or ADP refund, but they don't have enough money in their account because they took a 401(k) loan? I assume you can just adjust the outstanding loan balance and create a 1099 for the participant. That seems to be the only alternative.

Does anyone know if there is any guidance regarding this?

[Guest jims]

If the loan is limited to 50% of vested balance, this person must have some extreme numbers that created this situation.

[Below Ground]

Keep in mind that the 50% is at the time of the loan. With this in mind, I must agree with jims. Is this the first year of the plan? As a direct reply, I think you would need to "call" a portion of the loan to reflect that monies that are not qualified under the plan were used for the loan. Just a thought.

[BG5150]

Well, if this is a calendar year plan, you have until March 15 to get the refund out. Will enough of the loan be repaid by then to be able to make the payout?

[cpc0506]

Remember, you can have language in the loan program that does not limit the loan the 50% of vested balance. So it is possible that there might not be enough money in the account.

[fiona1]

Well I found out that the refund needed is due to a failing 415 test. An employer has a 401(k) and an ESOP. Most people rec'd a $46,000 ESOP contribution - which is right at the 415 limit for 2008. Combine that with the deferrals and match made to the 401(k), and the employer had over 20 participants exceed the 415 limit.

They are correcting the failure by refunding deferrals/match. There are actually 2 employee's who took 401(k) loans in 2009, however, and don't have enough money for the refunds.

I suppose we could forfeit a portion of the ESOP contribution for those 2 people - but I'm worried that would be inconsistent. The employer would be using different correction methods for different people.

I think adjusting the outstanding loan balance and taxing the excess seems like a reasonable approach. I just wasn't sure if there was any guidance on this or not. I doubt it.

Thanks!!