AlbanyConsultant Posted January 7 Posted January 7 I can't believe that I can't find a previous topic on this... Pooled 401k plan in a brokerage account. Participant L (who does not defer) takes out a loan... and the office manager who doesn't know any better codes it as pre-tax deferrals. It's a 9/30/24 PYE and the loan was taken in August 2024, so we just discovered it 4+ months in. To the plan, this is a non-issue, right? L owed $200 per paycheck, and that is what was deposited. The only 'allocation' is when we do the recordkeeping, so if we say those are loan repayments, then they are credited as loan repayments. Or do those not count as loan repayments, but rather deferrals... that weren't asked for? And what about L's W-2? It correctly shows pre-tax deferrals, because that is what happened. Any advice appreciated, thanks.
Popular Post Belgarath Posted January 7 Popular Post Posted January 7 They definitely are not deferrals. No deferral election was signed - this is just a payroll error. As you note, they are loan repayments, and are credited to the plan as such. The W-2, if it shows these loan repayments as deferrals is wrong, and should be corrected. Bill Presson, justanotheradmin, C. B. Zeller and 3 others 6
Popular Post C. B. Zeller Posted January 7 Popular Post Posted January 7 L needs a new W-2, or the payroll records need to be updated before the W-2 is generated. The participant did not have a valid cash or deferred election on file so there can not have been 401(k) deferrals. L's withholding is going to be off since the loan payments were treated as deferrals and not counted in taxable wages. They may end up owing more taxes when they file. If you wanted to pretend that somehow the loan payments were actually deferrals (I don't suggest this) then the loan would be in default and the participant would have a taxable deemed distribution. I suggest having a chat with the office manager and explaining how 401(k) loans work. Besides getting the coding straightened out, they also need to be aware that the loan payments are scheduled to end at some point in the future and they need to stop withholding from the employee's paycheck. Lou S., Belgarath, Paul I and 2 others 5 Free advice is worth what you paid for it. Do not rely on the information provided in this post for any purpose, including (but not limited to): tax planning, compliance with ERISA or the IRC, investing or other forms of fortune-telling, bird identification, relationship advice, or spiritual guidance. Corey B. Zeller, MSEA, CPC, QPA, QKA Preferred Pension Planning Corp.corey@pppc.co
AlbanyConsultant Posted January 8 Author Posted January 8 11 hours ago, C. B. Zeller said: I suggest having a chat with the office manager and explaining how 401(k) loans work. Besides getting the coding straightened out, they also need to be aware that the loan payments are scheduled to end at some point in the future and they need to stop withholding from the employee's paycheck. Oh, yes - chat already scheduled! Actually, this is all in the loan instructions we provide, so maybe "reading comprehension" will be the first thing discussed... Paul I 1
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