(b)lines Ask the Experts – Must Participant Loans Be Paid Upon Termination?

“The recordkeeper does not permit terminated employees to continue to pay off outstanding loans; instead, the loan is immediately due and payable upon termination of employment, and the outstanding loan amount is offset from the participant’s account balance if he/she is unable to pay off the entire loan balance immediately.This has created some difficulty for some of our terminated employees, who are unable to pay off large loan balances at once, and prefer continuation of repayments.” 

Michael A. Webb, vice president, Cammack Retirement Group, answers:        

You are correct! Neither the Code nor the final loan regulations under 72(p) require that loan repayments be accelerated at termination of employment in the manner you describe.

If the plan (and recordkeeper) permits, loan repayments may continue to be made by the participants; however, if a participant was previously making repayments via payroll reduction, he/she would be required to  make arrangements with the recordkeeper for direct repayment via check or electronic payments such as automated clearing house (ACH) deduction from a participant’s bank account.

Having said this, some recordkeepers do not wish to go through the administrative expense of working with individual terminated participants on direct repayment arrangements, and thus do not permit repayments of loans following termination of employment, instead requiring immediate payment as you describe. It is important to understand that this would be a contractual restriction of the recordkeeper, however, and not a legal restriction. 

At any rate, the terms of your plan, or related loan policy document, should be consistent with the contractual restrictions of your recordkeeper(s) in this and all other aspects of loan administration. The Experts find that confusion can often exist between plan sponsors, participants and recordkeepers due to a lack of documentation of plan/loan policy provisions.

Thank you for your question, and the Experts hope to see you at the PLANSPONSOR National Conference this week!

NOTE: This feature is to provide general information only, does not constitute legal advice, and cannot be used or substituted for legal or tax advice.