401(k) Loan Rollover from one plan to next

[Guest Tdavid]

Hi there.

So if you do rollover your loan from a prior plan to a new plan. Old plan allows transfer out and new plan will accept the loan note coming in.

How can you “catch-up” interest that you technically owed to the prior plan during the period where you couldn't make a payment to the old loan because you were terminated and they don't accept payments?

If there are three months that lapse between payments, and you are still within the original term cure period, wouldn’t you only be able to rollover your outstanding principal balance?

Example: 06/01/11 – Balance is $15,000. Interest rate is 1% monthly (for ease, $150).

Transfer to new company and set-up new loan

Principal balance as of 09/01 is $15,000 still. There has been missed interest for June, July and August.

You establish your loan and reamortize into new company 401(k) for a payment in September. Can the new company accept payments for missed interest that you owed to the prior plan? Or can they only establish $15,000 and charge 1% monthly going forward not to exceed original loan term length?

So technically, you missed $150 in interest to the prior company for June, July and August because you weren’t able to pay the prior company since you were terminated. Can that missed interest get incorporated into the new company payments? Or would they only be able to establish the $15,000 in principal as of 06/01/11 (the balance as of the last payment you made).

That 3 months of missed interest is a taxable distribution to you, you owed it to the prior company, but had no way to pay it to them because they won’t accept after termination partial loan repayments, only all or nothing payments were accepted there and the new company should only establish the principal?

Anyone know IRS regulations that talk about this? I have looked at Publication 575 and that doesn’t quite do it for me.

Thanks!

[Guest Sieve]

I think if you assign the loan with a loan assignment, the entire loan is treated as rolled over. So, if payments are missed, I'd argue that you now owe those missed payments (including interest) to the new trustee, and there would be reamortization of some type re: payments made to the new trustee.

[mbozek]

The assignment of the loan to the transferee plan is subject to all the provisions of the plan loan terms including the requirement to make all loan payments and the term of the loan. If 3 months of loan payments are due when the loan is assigned then they must be paid to the transferee plan by the end of the next calender quarter following the first missed payment and the payments will reduce the balance of the loan.

Loan regs are at 1.72(p)-1.