Participant Loans

Question: If I need a participant loan, can I get one?

Answer: Most plans allow loans, but to make sure you will have to check your Summary Plan Description or call your Human Resources Department.

Assuming loans are allowed, you will want to ask for a copy of the loan policy and see if you can agree to the terms and conditions.  Loans are limited to 50% of your vested account balance, but cannot be more than $50,000.   Before you take a loan, you may want to consider some of the following items.  First of all, if you remove money from your account by taking a loan, you will have to signup for loan repayments through payroll deduction.  The loans generally must be fully amortized over no more than a five year period.  The loans may be due immediately upon termination of service and that can be a hardship. 

Also, you are removing money from your investments that might have made much more than the interest rate you are going to pay back to your account, so your loan might be more expensive than you thought.  And finally, you cannot take an interest deduction for loans from your Salary Deferral account.  You might be able to take interest deductions for loans you take from a bank in the form of a home equity loan or a mortgage loan, so you should pursue those avenues first.

Once you take a participant loan from the retirement plan, you should plan on making the exact payments of the original amortization schedule until you decide to payoff the entire balance in a lump-sum.   Because of administrative difficulties, you generally cannot make arbitrary additional principal payments early and you cannot make early loan payments months in advance.  You do have the option of completely paying off the loan at any time.  In fact, that is a good thing to do because it gets your money back into your account earlier where it may be able to make considerably more for you in the investments. 

If extra payments are made early, we will simply credit those payments against future payments and not readjust the amount of interest per the original amortization schedule.  Handling early payments of principal involves too much administrative time and expense and Plan Sponsors do not want their cost of administration to go up because of this kind of participant loan activity.  So again, please plan on making exact payments per the original amortization schedule until you are in a position to pay off the entire remaining loan balance.

To model a loan, click here: Loan Illustrator

If you have questions about the above, please call Plan Design Consultants, Inc. at (650) 341-3322 and tell our Receptionist that you would like to talk to your "Administrator".