Plan Termination and 401(k) Loan

[Guest benefitsanalyst]

With a Plan termination, what happens to a participant who has an outstanding loan? Can they continue to make payments on it if they are still employed by the company?

[actuarysmith]

Since the plan will no longer exist, the loan will either have to be repaid immediately (in full), or the amount outstanding will become a deemed distribution (with taxes and possible penalties).

The loan is an asset of the plan. If the plan no longer exists, the loan is in default if not paid back.

Is there a another plan being set up by the sponsor? If so, maybe that plan could be set up to accept the loan.

One other approach might be possible - would the employer give the participant funds (outside of the plan) sufficient to repay the loan. Then the participant would effectively "owe" the employer, not the plan. This would allow the employee to make payments to the employer as you have suggested.

The downside, of course, is that the employer would have to "front" the cash to the participant and be willing to accept loan payments. There is the risk that the employee will terminate prior to all payments being made.

[Guest benefitsanalyst]

Thanks for your thoughts. However, it is my understanding that until you receive a determination letter on the termination of the Plan, loan payments can continue through normal payroll deduction. Is this thinking correct?

[actuarysmith]

I now understand your question to be slightly different that I originally perceived. If the plan & trust still exist, because you are awaiting the IRS to issue a detemination letter, I see no reason why the plan could not continue to accept loan payments.

I was answering the question originally assuming that the plan had been terminated and the assets had been distributed.