Frequently Asked Questions about Plan Loans

Q1: I have a loan from my 401(k) plan. I am quitting my job. What happens to the loan?

A1: This depends on your employer’s written loan policy. Your employer might require that you repay the loan entirely upon termination of employment, or within 3 months of your termination as indicated in the plan’s written loan policy. Failure to do so will cause the loan to go into default. It will then be treated as taxable income to you. You will be responsible for income taxes, as well as any applicable penalties. See your Plan Administrator for a copy of the Loan Policy.

Q2: Can I roll my loan over to my Individual Retirement Account?

A2: No.

Q3: My new employer’s plan allows loans. Can I transfer my loan to the new plan?

A3: Typically no, however this depends on the policies of both your old employer and your new employer. Both of them may allow this, in which case you can do so. Under the loan policy of the plan documents that are sponsored by The Paragon Alliance Group, you will not be able to do this as the outstanding loan is due and payable upon termination of employment. You will need to contact the appropriate person at your new company to find out how you go about this and exactly what information they will require from your former employer.

Keep in mind, however, that neither employer is required to permit a transfer of your loan. If either one of them does not permit this, then you may not transfer the loan directly to the new plan.

Q4: If I cannot transfer the loan to my new plan, and my old employer will not accept monthly payments, what can I do to keep from paying taxes on it?

A4: You must completely repay the loan before you take a distribution from your old employer’s plan, and before the loan goes into default.

Q5: Why is this so complicated?

A6: The Internal Revenue Service governs plan loans. Since retirement plan money has not been taxed, the IRS wants to be sure that loans are not abused in a way that allows employees to avoid paying taxes on funds they receive. Both your old employer and your new employer face substantial financial penalties from the IRS if they do not properly follow these rules. Do not expect this to be as simple or quick as transferring funds between bank accounts. Your employers have a duty to follow these rules and protect the tax benefits of their plans for all their employees.

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