Loan Repayment Requirements

What happens when I miss a payment?

If you miss a loan payment, the best course of action is to make up the missed payment. To get caught up, you can notify your payroll administrator to increase loan deduction amounts from your paycheck, or you can write a check to Charles Schwab Bank for the missed amount (see mailing instructions below).

Missing multiple payments can have tax consequences and potentially prevent you from requesting future loans. Once a payment is missed, you have until the end of the loan's cure period to correct the issue. If the issue extends past the loan's cure period, the loan becomes a deemed distribution from the plan and becomes taxable.

How can I repay a loan?

In most cases, regular loan repayments are deducted from your paycheck each pay period. If you want to payoff a loan ahead of schedule, you can either (1) notify your payroll administrator to increase the deduction to pay the loan off sooner, or (2) write a check to Charles Schwab Bank.

Mailing instructions for checks to Charles Schwab Bank are:

  • Make Check Payable To: Charles Schwab Bank, Acct # [Custodial Account Number],FBO [Your First & Last Name]
  • Regular Mailing Address: Charles Schwab Bank, P.O. Box 81686, Austin, TX 78708
  • (optional)Overnight mailing address: Charles Schwab Bank, 2309 Gracy Farms Ln. Austin, TX 78758

Please contact ERISA Support by 1-800-858-6989 or email support@erisa.com to be provided the custodial account number and total payoff amount.

What if I go on a leave of absence?

If you go on a non-military leave of absence (LOA), you can pause submitting loan payments until the earlier of (1) the end of your LOA or (2) 12 months. Keep in mind, going on a non-military leave of absence does not extend your time to repay the loan. Your loan is still expected to be repaid in full by end of the original amortization schedule. Military-related leave of absences can suspend loan repayments beyond one year, but the loan must be repaid within 5 years from the date of the loan plus the period of military service.

You can request to re-amortize the loan schedule and increase your regular loan repayments. Otherwise, you will be required to pay a balloon payment at the end of the loan's amortization schedule for all the payments skipped during the LOA.

What is a cure period?

A cure period is a period of time where the participant can make up all missed payments or refinance the loan (if refinancing is available) without facing tax penalties. While each plan can specify its own cure period, the maximum amount of time a cure period can last is the first day of the plan quarter following the quarter after the payment was missed.

Ex.: Loan payments was missed in November 2018. The cure period is the maximum length allowed, and begins the quarter following the missed payment (Q1 of 2019). The participant has until April 1, 2019 to correct the loan.

What happens once my loan is in default status?

If you have not repaid the missing payments for your loan by the end of the loan's cure period, your loan goes into default. This means that the loan is seen as a taxable distribution from the plan and you will receive a tax form for the amount that is to be factored into your personal tax return.

Do I have to repay the loan if it is deemed a distribution?

Once your loan is deemed a taxable distribution, you're still required to repay the loan. According to Reg. § 1.72(p)-1, Q&A-11 and -12, a deemed distribution is only treated as an actual distribution for tax purposes, and it does not forgive or "offset" the debt that you owe to your retirement plan account.

What happens to my loan if I change jobs?

If you retire or leave the company while you have an outstanding loan balance, the full outstanding loan balance becomes due. The loan will eventually be deemed a distribution if it is not repaid within a given time period depending on the year in which your loan was originally issued.

If your loan was issued prior to 2018, you have 60 days after your termination date to repay your loan in full before it is deemed a taxable distribution.

For loans issued in plan years 2018 and after, IRS publication 575 states that you have until your personal tax return filing deadline (or the extended deadline) to repay your loan in full. If no action is made to offset the loan after the deadline, your loan will be deemed a taxable distribution.

Additional Reading:

401(k) Plan Fix-It Guide - Participant loans don't conform to the requirements of the plan document and IRC Section 72(p)

Retirement Plans FAQs regarding Loans

Retirement Topics - Plan Loans

Reg. § 1.72(p)-1, Q&A-11 and -12

Case of the Week: Repayment of Defaulted Plan Loan After Deemed Distribution

IRS Publication 575 (2018) - Annuity & Pension Income


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