IRS Offers New 401(k) Loan Guidance Business Insurance (08/07/00) Vol. 34, No. 32 p.1; Geisel, Jerry
The Internal Revenue Service (IRS) has proposed some
rules and finalized some others, all intended to help employers
administer defined contribution plan loan programs. The rules
will apply to loans made after Jan. 1, 2002; they define when a
loan is considered in default and the tax consequences of a
default. The rules were published in the July 31 edition of the
Federal Register. Benefit experts say that the guidance is
welcome. Employers are permitted by federal law to allow
employees to borrow from their 401(k) and other defined
contribution plan account balances, and Hewitt Associates says
that over 80 percent of 401(k) plans have loan provisions. In
1995 and 1998, the IRS published rules on a number of loan
administration issues, and this year's rules finalize the earlier
proposals as well as proposing guidance in other areas.
Employers are permitted to give employees a grace period, beyond
which the outstanding loan is considered a "deemed distribution"
and becomes taxable income to the employees. The grace period,
or "cure period," may not extend beyond the last day of the
calendar quarter following the calendar quarter during which the
required installment is due. The rules also clarify how much of
a loan is considered taxable when more than the maximum amount is
borrowed. Employers can change the required installments when
employees return from leaves of absence, so the account balance
will be paid off in accordance with the original schedule.
However, the IRS has proposed that if an employee takes a leave
of absence for military service, the period of repayment time
would be extended by the length of the absence.