401k Loan and Severance Pay

[oriecat]

Is it possible to allow a terminated employee who is receiving severance pay to continue their 401k loan payments from the severance so that the loan will not go into default upon termination, but upon discontinuance of receiving pay?

EE has a large loan balance of almost 30k and owner is very concerned about it going into default and she would owe the taxes and penalty. She will be receiving severance for one year. Is there anything we can do? I am certain that he would be willing to make any plan amendments necessary if there is some way to deal with this.

Thanks for any thoughts!

[austin3515]

Is it possible? Sure, it's possible.

However most documents indicate that the loan is payable on the occurence of a distributable event, which severance from emplymnent would be. So if your document says that, then you are out of luck (barring an amendment).

[Bird]

I don't see a problem with making payments from severance pay. The plan and/or loan policy may or may not require trigger the need for full repayment on termination (and default if not repaid), and termination may or may not be a distributable event. Your answers should really be in the document/policy somewhere.