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EMPLOYEE RESIGNS WITH 401(K) LOAN
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EMPLOYEE RESIGNS WITH 401(K) LOAN
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We have recently converted our 401(k) plan from one company to another. In the midst of changing and switching monies, an employee who had an outstanding loan resigned. His repayment had only begun si
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Forums » Topic Forums » Legal Forum » EMPLOYEE RESIGNS WITH 401(K) LOAN
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EMPLOYEE RESIGNS WITH 401(K) LOAN
posted at 7/21/1999 1:52 AM EDT
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Posts: 99
First: 6/22/1999 Last: 12/11/2001 |
We have recently converted our 401(k) plan from one company to another. In the midst of changing and switching monies, an employee who had an outstanding loan resigned. His repayment had only begun six months prior and he had a long way to go. The old plan company did not want to deal with it so we transferred his remaining funds to the new plan and are having him repay the loan to his account there. Our old plan did not specify anything about repayment of loans upon termination. Now the new company wants to consider the loan a distribution if it is not repaid by the end of this year. And our new plan document is written with this verbage. Is there any violation of ERISA or the DOL if we tell him the outstanding balance will be considered a distribution if not repaid by 12/31/99? I can't find any guidelines or precedence on something like this. The lack of guidelines by the previous 401(k) company is only one of many factors why we changed. |
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EMPLOYEE RESIGNS WITH 401(K) LOAN
posted at 7/21/1999 5:17 PM EDT
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Posts: 2217
First: 6/16/1999 Last: 12/13/2001 |
Well, I hope whomever drafted your original plan is made aware of this problem. What do you mean when you write "The old plan company did not want to deal with it so we transferred his remaining funds to the new plan . . . ?" Was that with the employee's consent? What were the rules used under which one plans assets were dumped into another plan? Did the first plan allow this kind of distribution? With or without consent? Or, did you just "do it," sort of "a darn the consequences full speed ahead" kind of thing.
Sounds to me that if the first plan did not allow for a distribution and you let the employee have a distribution, then the plan administrator might have some legal trouble. I strongly advise you to consult with legal counsel. If you need a referral to an attorney in your area, just give me a ring, a line, a loan, an e-mail or whatever. Matthew T. Miklave, Esq. Epstein Becker & Green, P.C. 250 Park Avenue New York, New York 10177 (212) 351-4663 (212) 661-0989 (fax) MMiklave@ebglaw.com |
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EMPLOYEE RESIGNS WITH 401(K) LOAN
posted at 7/22/1999 3:29 AM EDT
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Posts: 16
First: 6/21/1999 Last: 7/19/2001 |
We've had several employees resign who had an outstanding 401k loan; it isn't that uncommon.
You need to check your summary plan description for your 401k plan. It should have been covered in the loan section. I suspect that even with the original plan, a resigned employee had to repay or take distribution. Most SPDs say that loan payments must be made through payroll deductions or in a lump sum repayment. A terminated ee has no payroll to deduct from, so has only the repayment option. For example, our plan requires employees to re-pay the amount due upon termination or the remaining amount due is considered a distribution and the separated employee will then receive a 1099 for this amount and will have to claim the distribution with their taxes that year. We've never had a problem with this; they either pay of the remaining due right away or take the distribution. Of course, there is a little grumbling sometimes, but not much, since it has only ever come up in cases where the employee resigned (their decision, not ours). I can see where there might be more grumblings if the employee was laid off or fired (not their decision). |
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