Question 401k loan

[Michaeldean]

Hello!

so I have a 401k loan for 15,000.  I have 25,000 left in my 401k.  I just got laid off from my job....  

i called and asked what to do and how to repay the loan , but they were not very helpful and I still have questions.  They mailed me a letter that says I can repay it by November 20, or December 20.  If I repay in December it is an extra 100$.

obviously, I can’t afford that right now.  My question to them was what if I can’t repay it by December 20?  She told me they would report the earnings to the irs and I would have to pay the taxes.  

Does that mean that for my income tax I would have to pay the 15,000 plus the tax.  OR does that mean they will include the 15,000 as income I earned on the income tax, but I would only have to pay the taxes?

thaanks for your help!!

[david rigby]

It means the remaining loan will be deemed to be a distribution; therefore part of your taxable income.  BTW, it's likely that your loan documentation includes some discussion about this. 

[Michaeldean]

Thank you very much!!

[ETA Consulting LLC]

11 hours ago, david rigby said:

deemed to be a distribution

If you terminated employment, then you have a 'distributable event'.  In this case, your loan will be offset; which is an actual distribution. This would be eligible for rollover. Just a minor detail that is typically missed. 

Good Luck!

[Tom Poje]

probably more specific info needed. you indicated you were laid off (rather than terminated) without knowing the loan policy it might be possible to continue loan payments. if the lay off is treated as a 'leave of absence' it might make a difference. is it possible you will get called back?  my quick search has

LAYOFFS

An employee who is laid off cannot claim termination pay under the act until the layoff exceeds 13 weeks in a 20-week period or — where a collective agreement is in place and includes recall provisions — until the layoff exceeds the period of recall under a collective agreement.The termination date, should the layoff reach this point, is deemed to be the date upon which the employee commenced the layoff. It is important to note that a layoff due to lack of work does not amount to termination for just cause.

years ago someone (not me) posted the following.

See Treas Reg. 1.72(p)-1 Q9, which is what I used when writing may FAQs. Here is how I answered this question in the FAQs I wrote.

Q38: What happens to a participant’s loan when the leave of absence ends?

A38: When the participant’s leave ends or after one year if sooner, the participant must repay the outstanding balance of their loan including interest that accrued during the leave by the latest permissible date allowed under IRC § 72(p)(2)(B) (i.e., 5 years from the date of the original loan, unless it is a primary residence loan). If the original term of the loan was for less than five years the IRS will allow the loan to be extended to 5 years. However, the new payment cannot be less than the original loan payment amount. If the original loan term was 5 years, the schedule may not be extended. Below are the repayment options:

Option 1: Reamortize the loan for the remaining term so that the remaining loan balance plus accrued interest are repaid (note: The amount of the installments cannot be less than the original loan payment).

Option 2: Resume making the normal payment amount and make a balloon payment at the end of the loan term for the remaining balance.

Option 3: Make a lump sum payment for the missed payments and accrued interest, and then resume the normal payment amount.

...............

this could mean if you are allowed to make payments for awhile you delay the distribution until 2019 rather than 2018, but without knowing all the details...