Loans Flashcards
What is a Participant Loan
Eligible EE of the plan removes funds from their 401(k) account w/ promise to pay back (with interest) within a specified time period
Are Loans allowed?
What circumstances must they meet?
Cannot be allowed for some EEs and not others
Nondiscriminatory in amount
AA must allow for loans
Reasonable rate of interest charged
Security in the form of vested account balance
Interest Rates
What is considered reasonable?
A loan must charge a rate of interest similar to what other companies in the business of lending money are charging for loans
Typically see prime + 1% or 2%
Who can take a loan?
Any employee that has:
- Met the eligibility requirements
- Has sufficient balance
Is there a limit on the amount that can be taken out as a loan?
The IRS has set a limit of 50% of the vested account balance or $50,000, whichever is less
How long do participants have to pay back loans?
The maximum repayment period for a standard participant loan is five years
Unless the loan is for the purchase of a primary residence
What are the default elections for loans?
- Minimum loan amt $1,000.
- Max number of loans allowed at one time: 2
- Repayment options: check, ACH or payroll deduction
- Loan interest rate: Prime + 2%.
What happens if participants do not make loan payments?
Payments must be made at least quarterly to avoid going into default
If a loan is considered to be in default, a deemed distribution will occur.
Cure Period
Is the grace period that a participant has to make their loan payments
Participant options when they have missed loan payments & didn’t cure in time?
To avoid taxable distribution?
Option 1: Lump sum pmt w/ interest to catch up & continue w/ original schedule
Option 2: Re-amortize outstanding loan balance w/ interest
Must be paid back w/in 5 years of origination
Option 3: Combo of Option 1 & 2
Participants that rolled money into the plan, but not met eligibility
Can they take a loan?
No, participants are required to meet eligibility requirements to take a loan
New Loan - what is needed?
- Completed loan application
- Current IM or 401k bank statement.
- Participant must meet eligibility and loans allowed in plan
Note: statement must list 401(k) plan name to be valid.
Interest Rates
What if a client wants a lower interest rate?
If the plan is under an audit & the interest rate is not in line with fair market value, then the plan could be seen as having an operational failure
What happens when a loan defaults and is deemed a distribution?
A 1099-R be issued (with a code L) for the amt of the outstanding loan balance
The participant will owe taxes on this amount when filing their personal taxes
My loan defaulted, how much do I owe?
1) the outstanding loan amount plus interest to the default date.
2) It would depend on the tax bracket (we don’t know/provide)
3) 10% penalty would apply if the EE is under 59.5.
