Loan Default and Qulification Issues

[Lou S.]

A participant has and outstanding loan in a 401(k) Plan and has also taken most of the allowable hardship limit.

The participant's hours have been cut such that making the payments is most of their take home check.

The participant would like to defualt on the loan but the outstanding balance is more than the allowable hardship limit.

If the plan sponsor allows the participant to default, what are the qualifiaction issues for the Plan?

Are there any options I'm missing? Loan is already amortized over maximium repayment period.

[ETA Consulting LLC]

These are two mutually exclusive sets of rules. The only time they are related is that you must take an 'available' loan prior to receiving a hardship. As long as the loan procedures are followed with respect to default, the fact that there is a hardship has no bearing.

Good Luck!

[masteff]

Agree. A default is simply a default, not a hardship.

In previous threads about a participant's ability to stop payments on a loan, the board has come to mixed conclusions. Part of the argument centers on what the loan policy and agreement say about how payments are to be made. The argument then debated preemption of state law as it applies to 401(k) loans and payroll deduction agreements. My opinion is if you think the participant was simply trying to bypass in-service distributions rules, then you might make some hassle to stop the payroll loan deduction. But where the loan is taking nearly their entire net paycheck, I don't see valid reason to prevent the change.