Participant Loans

Updated 2 months ago by Richard Phillips, EA, AIFA, CPC, CPFA, QPA, QKA

Retirement Plan Loans

If your plan allows participants to take loans from their retirement plan account, there are specific repayment rules and processing behaviors that you need to be familiar with.

Repayment Requirements

The IRS requires that participants repay their loan according to the terms of their promissory note and amortization schedule. However, a retirement plan loan repayment term cannot exceed five years.

Participants typically need to have their repayment schedule amortized to follow their company's payroll schedule so that their repayments can be automatically deducted from their paycheck each pay period.

Max Amount Available

The IRS limits the amount participants can borrow from their retirement plan accounts to the lesser 50% of their vested account balance or $50,000. A participant's outstanding loan balance over the last 12 months cannot exceed the IRS maximum limits. This can confuse some participants because this figure is not easily determined.

Loan Request Process

Participants may request a retirement plan loan through their online account. During this process the participant will be able to model their loan specifications and repayment terms. Once they complete the online request process, ERISA Partners will send an email to the participant with a copy of their loan paperwork to e-sign. After the participant signs, a copy will be automatically be routed to an authorized representative of the employer for their counter-signature. After the loan is authorized for disbursement, liquidation trades will be processed from the participant's account and their loan will be issued after trade settlement.

Your payroll department will also receive email notifications from ERISA Partners with the details of the loan and its terms so that your payroll staff may set up loan repayment deductions in your payroll system.

It is important to initiate a participant's loan repayments on-time to prevent operational failures in your plan from occurring.

Loan repayments should be set up in your payroll system as an after-tax deduction.

Repayment Processing Behaviors

If a loan payment is processed after the scheduled amortization date, our system will attempt to apply the repayment according to the following business rules...

  1. Satisfy the interest due on the oldest outstanding loan payment, then...
  2. Satisfy the principal on the oldest outstanding loan payment until all past due payments are made current. Next...
  3. Satisfy the interest due on the oldest outstanding loan (by origination date), then...
  4. Satisfy the principal on the oldest outstanding loan (by origination date), until all payments that are currently due are satisfied. Next...
  5. Apply any excess as additional principal to the oldest outstanding loan (by origination date)

Loan Payoffs

Participants can view their current payoff amount in their online account or they can contact ERISA Partners for a payoff quote.

Once a loan is paid off or is within two payments of being paid off, your payroll department will receive an email notification from ERISA Partners with the details of the final payments and the dates to stop repayment deductions in your payroll system.

Loan Consolidation/Refinancing

If your company allows participants to consolidate/refinance their retirement plan loans, the participant will need to contact ERISA Partners directly for assistance with this process. ERISA Partners will prepare a request form for the participant and sponsor to e-sign, which will initiate the process.

The same email notifications will go to your payroll department to alert your team of the loan being paid off and a new loan being issued, as they would with any loan payoff or issuance.

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