There are a few basic rules the DOL has established when it comes to 401(k) loans. More and more companies are including the loan option in their plans. Listed below are some basic tips on loans. Please remember to review your own Summary Plan Description for specific guidelines related to your plan loans.
- If your plan decides to allow 401(k) loans, there is a limit on the amount a loan can be. The maximum a plan can allow is (1) the greater of $10,000 or 50% of your vested balance or (2) $50,000, whichever is less.
- Typically plans will only allow one outstanding loan per participant. However, plans may allow participants to carry more than one outstanding loan. Any additional loan is added to the outstanding balance of the previous loan(s) and cumulatively must be less than the plan maximum amount described in the previous point.
- The plan may require an employee (if married) to obtain spousal approval to receive a loan.
- The plan must specify the procedures for applying for a loan and the repayment terms for the loan. Repayment terms cannot be longer than 5 years (if the loan is being used to purchase a primary residence it can be longer) and payments must be paid at least quarterly. A loan repayment is not considered a plan contribution.
- If there are employees who are performing a military service while there is an outstanding loan, the plan may suspend loan repayments.
- If a loan is not repaid according to its terms, it is generally treated as a taxable distribution from the plan for the entire outstanding balance of the loan (a “deemed distribution”). The plan’s terms will generally specify how the plan handles a default.