Change of 401k providers, changed repayment (principal reduction) rule?

[enzamatic]

Hello all - our company has changed HR benefits providers. Previously we had Slavic401k, and we moved to ADP (for that and all other benefits). A year before the switch I took out a 401k loan for the purchase of my home, which comes with a 15 year repayment duration. When I took out the loan via Slavic, there was an ability to make one principal reduction payment a year on top of your normal payroll withdrawals.

ADP is stating that there is no ability to make a principle reduction outside of payroll, you can only do a complete payoff.

I borrowed 50k to get us over the gap between closing our two houses, and paid off some credit card debt with it as well. So I'm about 10k shy of having hte full amount to pay back, while I have 40k sitting in savings. I had planned on being able to pay back the bulk of that, leaving just a few years of loan left. Now that isn't an option. This is complicated by the fact that I have kids going to college in just a year or two, and since that money is really 401k funds, I really don't want it being considered money I could be putting towards college in the student aid apps (considering if I did apply the funds it would be at a huge tx penalty!).

So - now I'm in a race against student loan apps, in a situation I did not foresee.

Is it legal for your employer to change companies in such a way that your loan repayment terms have changed? Or should all preexisting loans have to have the same terms (i.e. can I force ADP to let me make a payment?).

Thanks very much for any advice! I can find a lot on what happens if you lose your job, or change employers, or fail to pay it back, etc - but not about when your company changes the loan company and that changes your terms mid-loan.

[ESOP Guy]

Let me make sure everyone understands the facts. In the previous years was this extra payment made by you sending a personal check to the 401(k) company or was in an extra loan payment from a bonus check at work?

What I can tell you is if you were sending in a personal check that is pretty rare to be allowed so I am not shocked someone is saying they can't do it now.

I have my doubts that making an extra payment outside of payroll is a protected benefit.

[mphs77]

What do your loan documents say about repayment? Is it only by payroll or are additional

payments allowed?

As far as the new service provider (ADP), having done takeover work on Plan's

they have administered, I would be hesitant to accept their position as anything

other than "That's not the way we do it".

[jpod]

What do the terms of the loan say about this? I doubt the loan terms leave flexibility for the plan administrator or any other party to change them without your consent. ADP may be saying "we can't/won't/don't wish to deal with this," but that doesn't mean you can't pay down the loan as you see fit.

[david rigby]

What do the terms of the loan say about this?

Yes, this is the essential question. BTW, no one on these Message Boards can answer that for you; it is a question that should be directed to your company's HR department.

[jpod]

You say that you need to make the $40,000 in savings "disappear" for financial aid purposes. I am not in a position to question that. Assuming you are right about that, and further assuming you can't get any satisfaction from your employer and ADP, if I were in your shoes I would go to a bank or credit union and take a personal or home equity loan for $10,000 so I had enough money to pay off the loan in full. You'll just be paying interest to the bank on the $10,000 rather than yourself, but it sounds like it would be worth it for financial aid purposes.

[Jim Chad]

Also, you could increase your loan payment amount to equal your net pay check and use the $40,000 in saving to live on.

[BG5150]

Why don't you just pay off the whole $10,000 now? You'll be rid of the loan and have $10,000 less in savings for the college aid people to see.

Side note: if the loan program allows for it, and if someone wants to pay down a load from their own funds (additional payment(s) above the payroll deduction), I suggest the participant writes a check to the company and the company remits the payment along with the regular payroll. This way, on audit, all the payments are flowing across the company's books and no one will forget about the payment.

[GMK]

BG - I think he has 40k and is short the 10k to pay off the loan.

edit: I should have said that he or she is short the 10k

[BG5150]

Ah.

[hr for me]

I'd agree you need to go back to the original loan documents and see if that extra payment was stated in there or whether it was just a function of what the recordkeeper could do. That will be your answer (but do agree that ADP does it ADP's way and none other...I didn't like working with them as just a payroll provider passing information to us as the recordkeeper years ago and laughed hard when I heard they were getting into the Benefits business)

I know plenty of plans that don't allow any payments outside of payroll deductions at all except for the final payoff. And many that don't allow the amount/time period to be changeable (hard coded in payroll and on the recordkeeping system to accept a payment of $x every z days). That was generally because a specific amortization table was used (not that interest was calculated based on the balance each period). We used to have to re-finance/re-amortize the loan each time a non-scheduled payment came through. Now daily plans might have a better way of doing this, but we didn't and I haven't seen too many that do.

I would try to find the $10k somewhere else and get it fully paid off honestly.

[enzamatic]

Hi all..yess you have the gist of it. 50k borrowed from 401k, thought i could pay it back after closing but our hr changed 401k provider to adp and this changed rules. I have to take issue with calling that hiding money from financial aid as i got it from there with intent to return it immediately, it didnt stop being 401k funds and if i dont pay it back you can see that in how it would be treated for tax purposes.

I do have the original loan document and was surprised to see in double checking that it states in the document " Prepayment of the unpaid principal and accrued

interest may be made by the Borrower at any time without penalty." When I had asked in preparation before taking out the loan, they said I would send a cashiers check, amd it was limited per a doc on their website, which i cant access any longer since im not a participant, to once a year. However, I dont think this particular line implies that must continue, that line is about full principal only I imagine.

Sounds like youre on the same conclusion I was, just advance savings. If no surprises come up should be mext October, but wanted to get an opinion if there more efficient options.

Thanks so much for your advice!

[enzamatic]

If its not clear about the savings, i can only pay it off 376 a month. To save up the repayment amount, including the amount that was used for the month between closings, i must put it somewhere. I just doubt theres anything in financial aid calculations that recognizes that money as a 401k loan repayment in waiting instead of a free to spend asset. I surely wouldnt advise anyone to borrow from 401k for kids college, they have the rest of their life to pay off college loans but we have only x many years to save for retirement or theyre stuck with supporting us too.

[hr for me]

Your issue (and many others) are why I always discourage everyone I know from taking loans out of the 401k plan. It's just not a regular loan although people want to think of it that way and want it to work the same way.

I've seen way too many different (and bad) issues to ever recommend it but YMMV.

[enzamatic]

Indeed!