Can 403(b) Plan Participants Repay or Initiate Loans After Termination?

“I’ve spent my entire benefits career in corporate plans prior to my arrival at a nonprofit health care organization and have a question regarding its 403(b) plan. The plan appears to allow terminated employees to continue to repay loans, and even initiate loans, since repayments are made via ACH bank transfers rather than payroll deduction. Is this permissible? Even at my prior employers, where there were loans repaid by ACH, we still required full repayment or offset of the loan upon employment termination.” 

Charles Filips, Kimberly Boberg, David Levine and David Powell, with Groom Law Group, and Michael A. Webb, senior financial adviser at CAPTRUST, answer:

Yes, presuming the plan document or loan policy allows, loans can be initiated and repaid by former employees, provided that they are not withdrawing their full account balance from the plan. Technically, this would be permitted in a 401(k) plan is as well, but it is a far more common occurrence in 403(b) plans due to the following: a) payroll deduction loan repayments, which require active employment, are less common in 403(b) plans, and b) the history of 403(b) plans, where individual contracts between the vendor and participant have been, and continue to be, more common.

The ability to make loan repayments as a former employee, of course, eliminates an often unpleasant surprise with loans in the event of employment termination while the loan is outstanding, where a participant would often have to come up with a significant amount of money to repay the outstanding loan balance in order to avoid a taxable event. For more details on loan repayments post-termination, check out this prior Ask the Experts column.

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.