Return Loan Payments to Participant?

[cmick]

There is a participant who took out two loans. Loan 1 was paid off in the spring of this year. The loan payments were never stopped, and thus applied to the second loan. The participant recently noticed and would like the months of extra payments returned. Would this fall under one of the acceptable categories to take money out of the plan and return to the participant?

[Lou S.]

I don't think so. The participant has a valid loan and simply made a larger payment. Under what exception would you allow the funds to be returned?

If he overpaid the loans and had NO other loan then sure it's a mistaken deposit that should be removed from the plan.

[hr for me]

Does your loan setup allow for extra/larger payments? Does it state that in his loan documents? If so, I am with Lou S. However if the payments are specifically defined as $x amount and the only way to make an extra payment is to pay the whole loan off, you might have a different scenario.

So I go back to what do the loan/plan documents state on paying extra?

(and just as an aside and no clue as to whether this is legally doable -- could the current loan payment amount be lowered until he catches back up to his original amortization schedule? i.e. paying himself back the difference for a while? Would he be defaulting since his loan was paid ahead? He'd still have to make some type of payment though to keep the loan active... but who knows what exactly that would do to the total interest....)

[cmick]

Lou S., we would be giving the participant back the money, on the basis that the employer should have shut off the loan payments for loan 1 since the participant did not request extra payments be made on loan 2. Correcting an administrative error would be the ultimate basis for return, if we go that route.

HR for me, the loan provisions only state that payments must be made at least quarterly based on a level amortization schedule, which I guess could be interpreted to mean that the participant should not make extra payments. However, historically we've taken this to mean that participants must make at least payments on that schedule, and we have allowed participants to make extra payments on their loans.