Correction of Loan Overpayment

[Vlad401k]

One of our participants overpaid a 401(k) loan. The company failed to stop withholding loan payments after the loan was repaid. He then took out another loan.

 

Is the only way to correct this mistake to send the check to the participant for the overpayment?

 

Thanks.

[Paul I]

Sending the check is the cleanest way to correct it as long as the all of the plan accounting regarding the loan and the correction are consistent.  It isolates the correction to the original loan.  Note that if there is not full documentation of why, when and what happened, then the plan accounting could make the extra money in the participant's account look like an overpayment, or an invalid contribution, or some form of a permissible or impermissible plan distribution, or excessive income, or other anomalies.  Applying the overpayment to the new loan is tempting, but still requires full documentation of the plan accounting that would involve both the old and new loans.