Qualified Plan Loans – Repayment Upon Termination of Employment Can Be a Hardship
April 25, 2014
Authored by: benefitsbclp
The situation involved in Private Letter Ruling 201407027 illustrates that a participant can be caught between a rock and hard place when a qualified plan loan must be repaid upon termination of employment.
Administering qualified plan loan repayments following a participant’s termination of employment can be burdensome for employers. Most plans provide that a qualified plan loan must be repaid upon termination of employment to avoid a situation in which the employer must arrange for loan repayments other than through payroll deduction. Some plan recordkeepers provide post-termination loan administration services, but since loan administration errors can be costly and time-consuming to fix, employers tend to prefer requiring repayment upon termination of employment.
A plan loan which satisfies all the requirements under Section 72(p) of the Internal Revenue Code does not cause a taxable event at the time the loan proceeds are distributed from the plan. In addition,