401k loan default

[tomaszp]

Hello!

I have taken a 5-week leave of absence in mid-2014. After I returned, the payment on the remained of my 401k loan was adjusted so I figured the loan was re-amortized. Sometime in October, the loan was paid off. However, in November I received a check from the provider for $308. Thinking I have overpaid, I cashed the check without looking too closely at the paperwork.

Well, it turns out, my loan went into default in the amount of $308 (the check that they sent me). Sure, the repercussions aren't dire (taxes + 10% on the defaulted amount will be about $130) but I'm still a bit upset because it's MY $130 and THEIR fault (or at least deep in my heart, I feel it's their fault ).

Is there anything I can do to rectify this? Can I paid that $308 back before April 15, 2015 and not pay taxes on it?

Also, since the existing loan shows in default state, I'm barred from taking out another until I pay it off in which case I'd be paying taxes on this money twice. Yikes!

Any input appreciated!

tomasz.

[Lou S.]

Well I'm not sure you can "correct" the taxable distribution at this point but you should talk to the Plan Administrator about their loan procedures, particularly the the part about how they deal with a participant on an approved leave of less than 12 months and whether or not they allow payments to be suspended.

If it can't be "fixed" and you do repay the loan, get something in writing from then that your are paying off an after tax loan and that your repayment, at least of the defaulted amount, will create a nontaxable after tax basis in your account.

Good luck.

[QDROphile]

If you have been continously employed except for the leave of absence, it is strange that you would be getting a distribution relating to the default, especially after you returned to work. Even if the loan went into default, there should have been no actual distribution check -- you would have the tax equivalent of the distribution (a deemed ditribution), but no cash. You should have received no check even if the amount was distributable (an offset distribution). Your story sounds like many mistakes were made, including ones that the plan needs to fix. If so, you may be able to get a big fix, more along the lines of what you would like.

[ESOP Guy]

I am with QDRO I would start asking questions. Since it happened in Oct that might be an issue but I have never seen a situation where a loan default results in a check being issued. Something odd happened here is my opinion.

[BG5150]

There are a few of questions here:

1: how did the loan go into default? Usually, a loan will not default until the end of the quarter following the quarter in which the payments stopped. Usually. You were only out for 5 weeks, so there is no way you could have been a quarter behind. Check the plan's loan policy to see what the default schedule is.

2: what did they say the $308 check was for? Was it for payments you made after the loan defaulted?

3: did the plan administrator give you something in writing that the payment would go up and the reason for it?

[hr for me]

Is it possible you actually overpaid the loan with pretax money and they were refunding the overpayment? Because otherwise I agree you shouldn't have gotten any real money from a loan default and usually they would not default after a 5 week leave of absence. It sounds like someone miscalculated the repayment amount when you came back and that you overpaid yourself. Therefore it had to be refunded. What is the distribution code on the 1099R? I wouldn't think you would owe the 10% early withdrawal penalty on a refund.

[tomaszp]

Thank you. I will be calling the plan administrator again today armed with better questions thanks to the input in this thread. I'll let you know how it turns out.

[austin3515]

Your loan payments can be suspended up to a year for any leave. This is from the regs, but it is actually written in a pretty straight-forward manner.

§ 1.72(p)-1 Loans treated as distributions.

Q-9: Does the level amortization requirement of section 72(p)(2)© apply when a participant is on a leave of absence without pay?

A-9: (a) Leave of absence. The level amortization requirement of section 72(p)(2)© does not apply for a period, not longer than one year (or such longer period as may apply under section 414(u) and paragraph (b) of this Q&A-9), that a participant is on a bona fide leave of absence, either without pay from the employer or at a rate of pay (after applicable employment tax withholdings) that is less than the amount of the installment payments required under the terms of the loan. However, the loan (including interest that accrues during the leave of absence) must be repaid by the latest permissible term of the loan and the amount of the installments due after the leave ends must not be less than the amount required under the terms of the original loan.

[tomaszp]

Just a quick update. I wrote a letter to my plan administrator based on your comments. I have just received an email saying that the 1099R has been submitted for deletion and the default has been reversed. They will take their $308 over the next two pay periods.

Thank you all for your input!

This is victory.

tomasz.

[ESOP Guy]

Thanks for the update.