Repayment of loan after termination of employee to avoid deemed distriution

I have a client which has an employee that has been paying back a plan loan with a remaining term of 48 months. The employee is considering leaving the company. My 3 possibilites are:

1. Assuming that the employees leaves their money in the plan, can they continue to repay their loan even though they are not employed there anymore?

2. Assuming they take all of their money, can they continue to repay their loan even though they are not employed there anymore?

3. Is it true that assuming they terminate from the plan, basically, the outstanding loan will forcibly become a deemed distribution at the end of the first quarter following the quarter when the last repayment was due and no further repayments are allowed after DOT.

Thank you for the help - Rick

1.  That depends on the plan terms and the written loan policy terms, if the plan has a separate loan policy. I presume that the actual loan documents are consistent with the plan terms and loan policy terms, but the loan documents also must be considered. I think most plans accelerate the loan when the participant's employment ends because most loans are paid only by payroll deduction.

2. If the participant takes "all the money" the participant takes the loan as well, which should terminate the loan (with resulting taxation for actual distribution, not deemed distribution), leaving nothing to repay. If you mean the participant receives a distribution of the balance other than the loan, see #1.

3. Not always. See #1 and #2. Timing of taxation should be covered by the plan/loan policy terms. Plans may differ in default and acceleration terms, which are also covered by the loan documents. The loan documents usually do not speak to taxation, but the Summary Plan Description or loan disclosure documents should. 

Consider also the terms and conditions of the plan’s administrator’s service agreement with the recordkeeper.

That a plan’s governing documents permit or even provide something does not by itself obligate a nonfiduciary service provider to provide a service to support doing that something.

True. If there is a conflict with what the plan provides and what a non fiduciary service provider is engaged to do, the fiduciary plan administrator is going to be in a real bind, especially if the participant understands the participant's rights and benefits and wishes to exercise them. That is unlikely in the circumstances described. The service provider system driven arrangements will be imposed on the participant, and no one will be the wiser. So ask the service provider what is going to happen (notwithstanding whatever the plan terms are).

I agree with all of the previous replies, but I wanted to point out that another thing that might be worth considering are the terms of the promissory note evidencing the loan. It could theoretically be considered by the IRS to be a part of the "terms of the plan" which might actually conflict with the plan document or other items. Therefore, when deciding on amendments including as applied to plan loans, it is also advisable to take the time to consider the wisdom of also taking a look at the terms of the promissory note and revising them for prospective loans to make them consistent with the terms of the plan and the plan loan policy document.

To follow rocknrolls2’s observation:

If an employer/sponsor/administrator uses, through its recordkeeper or third-party administrator, a plan-documents set, does the document-assembly software also generate the participant loan procedure and the form of promissory note?

If so, will these documents be logically consistent, one to another?

Or are there ways errors result even within one service provider’s set?