Unpaid Loan Balances

[Guest wallacea]

When a participant terminates employment, how long does he have to repay an outstanding loan balance in full? We have been administering our Plan using 60 days from the termination date (and then the balance becomes a taxable distribution for the year), but are now being told 60 days is incorrect.

[Richard Anderson]

The plan should have a loan policy that would say what happens to the loan after termination of employment. Is there is a loan policy, what does it say? What does the SPD say?

Some loan policies allow terminated participants to continue making loan payments after termination; although, most don't allow continued payments.

If your plan does not allow loan payments to continue after termination, then the loan defaults when a required payment is missed. At that point the loan balance (principal and interest) becomes a distribution. However, the plan may allow for a grace period for "curing" the default before it becomes a distribution. The maximum time for this "cure" to occur is the end of the calendar quarter following the missed payment. If the plan does not allow periodic payments to continue after termination, then, the "cure" is for the the employee to pay the loan balance in full.

The plan does not have to provide for the grace period, but if it does, the grace period can be any time period desired as long as it does not exceed the end of the quarter following the first missed payment.

So, to answer your question, 60 days is a perfectly acceptable grace period, even though it is shorter than the maximum grace period allowed.