Participant owes Co Money but left

[JKW]

A company let a participant borrow $ and now the participant left the company. The participant is willing to sign over part of their 401k back to the company. For example they would take a distribution that was taxable to them, but make the Company the Payee. If there is signature guaranteed distribution request - is this ok? Any guidance would be appreciated.

[Lou S.]

He can't assign his benefit directly to the company but there is nothing that says he can't pay the distribution over the the compnay after he recives it.

How you accomplish this is often a matter of art.

[Guest EE Bene]

So this loan was made outside of the 401(k) plan? Does the participant have no other means by which to repay the loan?

The participant certainly can't assign his/her right directly to the company. There is only one exception to that rule, and that's through a QDRO in connection with a divorce.

I think getting the 401(k) involved is problematic. On its face, an artfully crafted arrangement might seem ok, but you also need to consider the prohibited transaction rules under ERISA and the Code. Consider Code Section 4975( c)(1)(D) which says it's a prohibited transaction to engage in any direct or INDIRECT transfer to, or use by or for the benefit of, a disqualified person of the income or assets of a plan. Company is a disqualified person. Participant is a disqualified person. Btw, that is just one example. As a plan fiduciary, the Company has all kinds of extra problems under ERISA 406(b) which prohibits a fiduciary from dealing with plan assets for its own benefit (i.e., getting a loan repaid).