401(k) Loans: The Good, The Bad and The Ugly

October 05, 2016

loan, 401k

Joel Manzer

3182161_l.jpgAs a business owner, there may be times when an employee may turn to you to ask for help, such as an advance in pay, in order to address a particular hardship.  Of course you want to help, but lending money to an employee should only be considered after all other options are pursued.  There are risks and rewards associated with helping an employee in times of need, many can be associated with being legally compliant, which we share here:  “Employer Lending: Exposing Risks and Rewards[1]

There are other options that are available without becoming a lender – such as a 401(k) loan.  

According to SBA.gov,  If the employee has an account in your 401(k) and the plan allows loans, the business doesn’t have to become a lender. Instead, the employee can borrow up to 50% of his/her account balance (up to a maximum of $50,000). The plan must charge a reasonable rate of interest and repayment must be made in level payments over a period of no more than five years (there’s an exception to this repayment period for loans to buy homes). But caution the employee that if he or she leaves the job—voluntarily or otherwise—the loan must be repaid in full (usually within 30 or 60 days). The failure to do this results in having the outstanding balance treated as a taxable distribution; if the employee is under age 59-1/2, the distribution is taxable and subject to a 10% penalty. Find details about plan loans from the IRS[2]

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Employer Lending: Exposing Risks and Rewards


Copyright: andresr / 123RF Stock Photo

Owning, operating, and managing a business in today’s economic and regulatory environment is more challenging than ever. On top of their normal day-to-day obligations, busy executives also need to stay on top of ever-changing employment law.

Of course, anyone overseeing or administering employee benefit plans needs to be well-versed in federal laws, such as the Employee Retirement Income Security Act (ERISA) and the ever-changing IRS Codes. However, it doesn't stop there.

Employers today must also maintain compliance with both state and local regulations.

One challenge in remaining compliant with these laws is the ability to fully understand which employment practices and/or benefits are affected by the shifting sands of laws and regs.

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