Request to stop loan paymemts

[jmartin]

A participant has an outstanding loan. Loan payments are paid via payroll deduction. Can the participant request loan payments to stop and then restart down the road (assuming they catch back up, down extend beyond  the term of the loan, etc.)?

[Bird]

I don't think you can stop them from doing that.

To be fair, others here think differently.

[RatherBeGolfing]

I agree.  You cannot force a participant to make the loan payment, even if the loan paperwork says via payroll deduction and the participant agreed to the terms.  If the participant does not meet his/her obligations, then you default the loan when appropriate, that is your recourse.

As bird said, others will disagree.

[Lou S.]

What does your Participant Loan Policy say?

I think legally the participant can direct the company to stop deducting the payments from his/her check. 

At that point the question then becomes how flexible the employer wants to be on accepting payments (as long as they are in compliance with 72(p)) and when the loan is in default resulting in taxable income to the participant.

 

[My 2 cents]

I do not work on loan default issues, but it is my understanding that there are no options if the participant stops repaying the loan.  I thought that every penny of the outstanding balance has to be reported to the IRS as taxable in the current year (possibly with additional excise taxes).  The employer has no discretion with respect to that.  The plan has no alternatives - it cannot allow the participant to buy his or her way out of the default later, even if resuming repayments is permitted.  Is it not that way?

[RatherBeGolfing]

1 minute ago, My 2 cents said:

I do not work on loan default issues, but it is my understanding that there are no options if the participant stops repaying the loan.  I thought that every penny of the outstanding balance has to be reported to the IRS as taxable in the current year (possibly with additional excise taxes).  The employer has no discretion with respect to that.  The plan has no alternatives - it cannot allow the participant to buy his or her way out of the default later, even if resuming repayments is permitted.  Is it not that way?

Well it would depend on the loan policy and when default occurs.  As long as payments resume and are paid in full within the cure period, a participant could request that no payroll deduction is made for some period of time.  In that sense you could "pause" payroll deductions, but if you stop and the cure period expires your scenario above is correct.

 

[ESOP Guy]

What does the promissory note say?  Back when I worked in the 401(k) world our standard promissory note said they agreed to make payment via payroll deduction.

 

I understand a contract can not make something illegal legal but it could be a breach of contract.  I forget how that all interacts but something to look into.