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.

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