Was it a loan, or a disbursement?

[Soconfused]

Hi, everyone. I have an issue, and I hope you all can help. It is long and complicated, but I appreciate any clarification to help us get this resolved. In 2014, my husband requested a 401K loan from his company. It was approved, and repayment terms were set. We got the money and payments were held every paycheck until January of this year. During this time, my husband's job title and pay changed often, so we never really paid attention to the changes in pay. After the first of the year, I did notice his loan balance wasn't decreasing, so I attempted to contact his benefits person through email and phone various times with no response. In July, we received an envelope with several letters from MassMutual (who has 401K and loan) stating the checks they sent us were never cashed. I had no checks and no clue what this was about. My husband called and was informed his loan was in default and all checks mailed to them from his company had been returned. Upon further investigation, he previous benefits lady had allowed the loan to default but continued to mail the payments to MassMutual, who then returned every payment back to the employer. This went on for over a year, and we never heard a single thing about it from either party. Between the two, they have "found" about 12 checks (out of approx. 26) and reissued them to us. MM told my husband they knew it wasn't his fault and would work with us to reinstate repayment. This was 2 months ago. Yesterday, I received a letter stating the loan was basically refinanced, and for a lovely payment of $900 a month for 2 years, it would be paid. It also said we could default, get a 1099-R and basically call it done. First, $900 is ridiculous and absolutely not a possibility. Second, I distinctly remember getting a 1099-R and paying taxes on the loan amount back in 2014. I verified this with my records, and we paid taxes on the full amount on 2014 taxes. I know we hold some responsibility. I know he was young and dumb to do this to begin with. However, I need HELP!!!!  If it was in fact a loan, should we have even gotten the 1099-R? Since we did, can we change it to a early withdrawal and get what money was paid back to the "loan" refunded? Do I need to contact a lawyer, and if so, what specialty?

 

[My 2 cents]

51 minutes ago, Soconfused said:

Hi, everyone. I have an issue, and I hope you all can help. It is long and complicated, but I appreciate any clarification to help us get this resolved. In 2014, my husband requested a 401K loan from his company. It was approved, and repayment terms were set. We got the money and payments were held every paycheck until January of this year. During this time, my husband's job title and pay changed often, so we never really paid attention to the changes in pay. After the first of the year, I did notice his loan balance wasn't decreasing, so I attempted to contact his benefits person through email and phone various times with no response. In July, we received an envelope with several letters from MassMutual (who has 401K and loan) stating the checks they sent us were never cashed. I had no checks and no clue what this was about. My husband called and was informed his loan was in default and all checks mailed to them from his company had been returned. Upon further investigation, he previous benefits lady had allowed the loan to default but continued to mail the payments to MassMutual, who then returned every payment back to the employer. This went on for over a year, and we never heard a single thing about it from either party. Between the two, they have "found" about 12 checks (out of approx. 26) and reissued them to us. MM told my husband they knew it wasn't his fault and would work with us to reinstate repayment. This was 2 months ago. Yesterday, I received a letter stating the loan was basically refinanced, and for a lovely payment of $900 a month for 2 years, it would be paid. It also said we could default, get a 1099-R and basically call it done. First, $900 is ridiculous and absolutely not a possibility. Second, I distinctly remember getting a 1099-R and paying taxes on the loan amount back in 2014. I verified this with my records, and we paid taxes on the full amount on 2014 taxes. I know we hold some responsibility. I know he was young and dumb to do this to begin with. However, I need HELP!!!!  If it was in fact a loan, should we have even gotten the 1099-R? Since we did, can we change it to a early withdrawal and get what money was paid back to the "loan" refunded? Do I need to contact a lawyer, and if so, what specialty?

 

Not following everything you said, but it sure sounds as though a good lawyer would come in handy.  Perhaps an ERISA lawyer would be a good starting point.

I am not a lawyer, but I find some of the things you said to be very confusing (especially "...we paid taxes on the full amount on 2014 taxes.", since it would be my [imperfect] understanding that if you did take out a 401(k) loan in 2014 that was not in default, it would NOT be taxable at all). One pays taxes on 401(k) withdrawals but 401(k) loans, which are not withdrawals) are not taxable.  Not sure if they even have to be reported on one's taxes.

If you took out a 401(k) loan and a repayment schedule was established, it wouldn't matter if pay went up or down (unless it went down so much that the repayments could not be made).  Repayments are tied to the loan balance and are not indexed to subsequent wages.

Are you saying that amounts were withheld from pay to repay the loan but the employer did not remit them to MassMutual?  THAT IS A HUGE FIDUCIARY VIOLATION and you can sue the employer (who will always be considered a plan fiduciary, however much duties have been delegated) for any problems that would cause! 

See a lawyer, for sure!

[Nate X]

Here is the way I understand the facts:

The loan was issued in 2014.  Payments were held every paycheck until January of this year (2017), but MM stopped receiving them sometime in 2014, and issued a 1099-R for that same year because they saw the loan was in default.  Your husband is still employed with the company that offers this retirement plan.

 

Assuming that is what happened, MM would have been required to keep the loan on their records in case your husband wanted to pay back the loan.  Assuming the 1099-R issued in 2014 was not a mistake and he did want to pay back the loan, the loan payments would be after-tax deposits and would not be taxable when he later took a distribution.  Paying back the loan in this case is not required.

 

Now go back and assume the 1099-R issued in 2014 was a mistake and you want MM to correct this, then you would be to amend your tax return for 2014 to remove the 1099-R. There's different ways MM could choose to correct this, but it looks like the way they chose will cost you $900 today.  If you add up all those non-deposited checks then I'm guessing it's not much more than that.

[ESOP Guy]

I would recommend not starting with a lawyer they are going to cost you a lot and it isn't clear at this point they will be able to do much for you.  The loan rules are very strict and they really don't care whose fault it is if you loan goes into default what happens happens. 

Here are the steps I would take:

1)  I would have your husband talk to someone in management that has responsibility over the plan inside the company he works for.  If they decide it was their fault and they have an obligation to do right by your husband they can take a number of actions to get this corrected.  If this happens you might like the result and you haven't spend a bunch of money.   If the company is willing to spend some money on lawyers to fix this (at their cost not yours) there MIGHT be a complete fix of the whole problem. 

2) If that seems to not be working out for you and then I would go to the Dept of Labor (DOL).  They have Benefits Advisors that can help you by contacting the company.  They do not look favorably on loan payments not being deposited timely.  The point isn't to get the company in trouble to get things resolved.  It is the government so it isn't the fastest process in the world but it doesn't cost you anything.  I believe this is the correct link. https://www.askebsa.dol.gov/WebIntake/Home.aspx

3) Only after this would I go to the expense of a lawyer. It would be an ERISA lawyer you would need.

By the way I am with Nate X the way you describe the facts is confusing so before you get a lawyer you might want to make sure you have the facts correct. 

Good luck feel free to come back here if you need more advice there are plenty of retirement experts here.  Also, wouldn't mind an update if you ever resolve this.

 

 

[Soconfused]

Thank you all, and I sorry the facts sound confusing, but that is because they are confusing. Nothing about the situation makes any sense, which is why we needed some advice. I will pass this info along to my husband so he can continue to try to get it settled. Thanks again!

[duckthing]

It sounds like the employer submitted the checks but they were returned. If MM returns a check to the employer, it's generally because they have no idea what to do with the checks -- in other words, the employer probably didn't include any information with the checks indicating that they were for your husband's loan repayment. In that case MM would (should) have contacted the employer to ask what the check is for. By the sound of it, whoever was in charge of payroll at the employer's office didn't get those messages or didn't know what to do with them, and didn't think to ask anybody.

[My 2 cents]

Unless there are other factors involved, I stay with my opinion that everything that went wrong was a result of plan fiduciaries not fulfilling their duties.  Perhaps working through the DOL would work best (I would not expect them to be terribly sympathetic with respect to things the fiduciaries should have done but did not).

I also expect that if amounts were held back from pay but were not applied towards repayment of the loan (whether due to actions/inactions by the employer or investment manager), someone somewhere ought to owe them a hefty amount of interest (and penalties?).

[My 2 cents]

Afterthought - the participant should not be concerned with the employer getting mad at them for pursuing this.  Any attempt at reprisal creates a separate legal cause of action.  They are 100% protected when they seek ERISA rights.

[Doghouse]

It sounds to me like it may have been processed as a withdrawal, rather than as a loan, in the first place. Which would explain why the repayments were "returned".

[My 2 cents]

3 minutes ago, Doghouse said:

It sounds to me like it may have been processed as a withdrawal, rather than as a loan, in the first place. Which would explain why the repayments were "returned".

If so, it would be a rational explanation of a benefit that was totally messed up.  As noted in the original post, "In 2014, my husband requested a 401K loan from his company. It was approved, and repayment terms were set."  Still indicative of a fiduciary failure.

[TPAJake]

As mentioned earlier, checks were probably sent with no identifying information or the wrong information.  If the 1099 was issued for 2014, the loan may never have had any payments credited.  I agree it's a fiduciary issue, but you won't have much traction with that.  The good news is that you have until 2019 to get it repaid now that it has been re-amortized for you.  It sounds like you have some refund checks coming your way, that should help you get caught up...

[My 2 cents]

16 minutes ago, TPAJake said:

As mentioned earlier, checks were probably sent with no identifying information or the wrong information.  If the 1099 was issued for 2014, the loan may never have had any payments credited.  I agree it's a fiduciary issue, but you won't have much traction with that.  The good news is that you have until 2019 to get it repaid now that it has been re-amortized for you.  It sounds like you have some refund checks coming your way, that should help you get caught up...

Money was withheld from the employee's pay, after taxes.  Any checks sent on towards repayment of the loan were cut by the employer (undoubtedly a fiduciary of the plan).  If the employer and custodian couldn't get their act together with respect to handling of those repayments, 100% of the blame belongs surely to one or both of them.  They failed to exercise reasonable competence in the handling of this matter and it should be on one or both of them to make the employee whole.  As I always point out, I am neither a lawyer nor a 401(k) plan practitioner, but how could it possibly be interpreted otherwise.

Assuming that there was no 10% excise tax for an unintended premature distribution, perhaps since the employee already paid taxes due, the only real harm is attributable to the unnecessary pay reductions intended for loan repayments.  Those should be refunded with accumulated interest no less than a suitable market rate or credited to the account with back interest.

[TPAJake]

I agree with you, but interpretation is not always reality.  I also agree that 100% of the blame goes to the fiduciary, but 100% of the consequences usually end up on the Participant in my experience.  As you said earlier, the DOL won't be too sympathetic but it's worth a shot.

[My 2 cents]

4 minutes ago, TPAJake said:

I agree with you, but interpretation is not always reality.  I also agree that 100% of the blame goes to the fiduciary, but 100% of the consequences usually end up on the Participant in my experience.  As you said earlier, the DOL won't be too sympathetic but it's worth a shot.

Nothing to lose by going to the DOL