Loan Repayments after Pay Changes

[erinak03]

I have a plan where a participant took a 5-year loan in 2015 and dropped back to part-time effective January 2016. At this point he is not terminated due to the part-time/on-call nature of his position so the loan is not officially due and payable per the loan policy. Since his paychecks are sometimes very small, his net pay is not often high enough to cover the loan repayment (or results in a very high percentage of his paycheck). The plan only allows for one loan and, while the policy allows for refinancing, his original loan was for the full 5 years so we can't refinance to extend the life of the loan beyond the original term. Should the payroll department be withholding as much as they can (even if it results in a $0 take-home check)? Or at what point does the employer determine that he's actually terminated and then rehired upon the next time he is accruing a paycheck (and the loan would therefore be due and payable and therefore defaulted upon)? Thanks for your input!

[Lou S.]

what does the loan policy say?

at some point he's in default if the payments aren't made/caught up.

[erinak03]

The loan policy says the loan becomes due and payable upon termination and that any missed payments cause the loan to be defaulted after the cure period. So yes, eventually if enough loan repayments are underpaid/missed then the loan will be in default.

But what about in the interim? Do I tell the plan sponsor that they need to continue to withhold the loan payments which may essentially not even allow the participant to receive a check when his gross wages are too low to fully cover the loan repayment? For example, his loan repayments are $85/paycheck. In a payday when he may only work a handful of hours and his net pay is only $60, does the plan sponsor need to withhold the full remaining paycheck amount (which, yes, would still not cover the payment and would render him behind schedule unless he can catch up later)?

While the loan policy does state that the repayments are to be made by payroll deduction, the state does require that employers have permission from employees to withhold most items from paychecks. I suppose the employee does have the ability to revoke his permission to have these payments withheld from checks and subsequently default on the loan. Obviously this is not the optimal solution as it circumvents distribution rules and I know there are several posts on this subject but I'm not sure what the employer could do should the participant revoke permission.

All that said, I guess the most appropriate response as the TPA is to simply inform the plan sponsor that, since the participant is still employed, the loan repayments are still in effect. If the paychecks are not sufficient to cover the full payment then the participant is subject to make up the difference. Thoughts?

[Lou S.]

All that said, I guess the most appropriate response as the TPA is to simply inform the plan sponsor that, since the participant is still employed, the loan repayments are still in effect. If the paychecks are not sufficient to cover the full payment then the participant is subject to make up the difference. Thoughts?

I would agree with this approach.

[ESOP Guy]

It can be a pain and mess but does any of this allow the person to make loan payments via personal check? If so, can the loan be kept current via method?

[erinak03]

The plan's assets are at JH so I don't believe check submissions are an option unless it goes through the plan sponsor.

[K2retire]

Be careful, some states limit how much you can withhold from someone's pay. That may prevent them from using all of the paycheck toward the loan.

[hr for me]

While there are some limits on wage deductions, those limits are generally for non-voluntary deductions (such as child support and tax liens and other garnishments). A 401(k) loan is a voluntary deduction that the employee voluntarily signed for. So those limits would not apply.

Is he also have deferrals deducted or has he stopped those? Which order are deductions calculated? Can your payroll system hold a negative owed and add it to the next payment/next paycheck to cover the difference? Such that he might be late one payroll but catchup the next?

I agree with your "most appropriate" response. However, has this issue been communicated to the employee and does he still want to try to keep making the payment or would he rather default? Does he even want to try to write a personal check each pay period? I supposed he could remove his voluntary deduction with a revocation....and then the loan would default at the appropriate time.

Whatever you do, make sure the payroll department can actually process it! So many times they aren't considered in the solution.

[erinak03]

I did confirm yesterday that the employee is not currently deferring from pay, so at least I can avoid that potentially ugly conversation.

The client is going to follow up with the participant. The employer has had an employee write them a personal check to forward to JH for an early loan payoff so they have run into a similar situation in the past, albeit under a different set of circumstances.