|
|
|
| Issue: |
One of your employees is about to go on military leave. He is currently repaying a loan from his 401(k) plan. Do you need to suspend his 401(k) loan repayments while he is serving in the military? |
 |
|
|
Answer: |
Generally, a loan from a 401(k) plan must be repaid within five years (10 years for loans for the purchase of a principal residence). A loan must be amortized on a substantially level basis and payments must be made at least quarterly over the life of the loan.
However, a 401(k) plan may (but is not required to) suspend an employee's obligation to repay a plan loan during the period of the employee's military service (even if the individual is not entitled to reemployment) without risking disqualification or engaging in a prohibited transaction.
Under IRS final regulations, if a plan suspends loan repayments for any part of a period during which an employee is performing military service, the suspension will not cause the loan to be a deemed distribution, even if the period during which the loan is suspended exceeds one year and even if the term of the loan is extended. However, the employee must resume repayments upon the completion of military service. The loan, including interest accrued during the period of military service, must be repaid in substantially level installments over a period that ends no later than the latest “permissible term of the loan,” plus any period of suspension authorized for military leave.
|
|
|
