Participant Loans

Requesting A New Loan

Retirement plans may offer loans to participants. You may borrow up to 50% of your vested account balance or $50,000, whichever amount is lower. Generally, loans must be repaid within five years, unless the loan is used for purchasing a primary residence. Repayments, along with interest, are typically deducted from your payroll and sent to the recordkeeper by the plan sponsor.

Loan Request Process

• Review Plan Rules: see the Summary Plan Description or your plan’s information online within your account
• Calculate the Loan Amount: typically on your plan’s website
• Complete the Loan Application: may be available online through your plan’s website or a paper form may need to be requested
• Submit Application: submit the completed application to your plan administrator or through the plan’s website
• Receive Loan Funds: once approved, the funds will be disbursed to you. This process can take 7-14 days
• Monitor Repayment: ensure the payments are deducted from your payroll and keep track of the loan balance and repayments

What Happens if a Participant Terminates Employment

Participants may be required to repay the loan balance in full if they leave the company or if the plan is terminated. Unpaid loans are treated as distributions and reported on IRS Form 1099-R, which may have tax consequences and a possible penalty. It is advisable to consult with a tax professional for questions regarding tax implications of your loan.

Deemed Distribution

Loans that exceed allowable limits or do not adhere to repayment schedules are considered “deemed distributions,” subject to income tax and potentially a 10% early distribution tax.

Exceptions for Military Service and Leave of Absence 

• Military Service:Loan repayments may be suspended during active duty, with the repayment period extended.
• Leave of Absence:Loan repayments may be suspended for up to a year; however, the repayment period is NOT extended.

Considerations Before Borrowing

Consult a financial planner to evaluate whether borrowing from your retirement plan is the best option compared to other loan sources.

Disclosure

Check your plan rules for specific loan provisions, as your retirement plan may not permit loans.

Additional resources: Retirement Topics Loans | Internal Revenue Service