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COLLECTED WISDOM™ on 401k Loans

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An Overview: 401k Loans

Abstract: A quick overview and background on when 401k plan loans are allowed. Located on: 401khelpcenter.com.

IRS Spells Out Two Available Plan Loan Computations

Abstract: The IRS clarified the two ways DC plans can calculate maximum participant loan amounts in a memo that should bring some relief to plan sponsors and administrators.

Source: Blr.com, May 2017

A Forgotten Part of Participant Financial Wellness: Loan Defaults

Abstract: With all the industry focus on financial wellness, it begs the question. Why do plans ignore an ongoing source of retirement plan leakage: defined contribution plan loan defaults?

Source: Plansponsor.com, May 2017

Administrative Check-Up on Participant Plan Loans

Abstract: The IRS just issued a memo to its auditors approving two different methods for calculating the statutory limitation on available loan amounts when a participant takes a new loan within 12 months of having paid off another loan or is obtaining a new loan with an other loan outstanding. In addition to verifying your recordkeeper is properly utilizing one of the two approved methods, it is also a great time for an overall plan loan check-up.

Source: Poynerspruill.com, May 2017

IRS Suggests Two Ways for Determining Loan Amounts Available to Participants

Abstract: In a memorandum to Employee Plans examination employees, the IRS has clarified there are two ways an employer can determine the highest outstanding loan balance in the past year when calculating the amount of an additional loan a participant can take from her DC plan.

Source: Planadviser.com, April 2017

Common Errors and Corrections in Retirement Plan Loans

Abstract: Although retirement plan loans can increase administrative responsibilities, many plan sponsors include them as a plan feature with the idea that offering participant loans can help to encourage a higher participation rate. Despite your best efforts, loan mistakes can happen. Knowing what resources are available to fix errors can help.

Source: Fidelity.com, April 2017

Participant Loan Refinancing

Abstract: Allowing more than one participant loan in a retirement plan is not a black-and-white determination. The plan sponsor and its service providers must ensure that additional loans or refinanced loans are properly administered in accordance with the plan document and the loan regulations.

Source: Belfint.com, April 2017

EPCRS: Participant Loan Corrections

Abstract: Plan failures related to participant loans can be corrected using either Voluntary Correction Program (VCP) or Correction on Audit. Since plan loan failures are not operational failures, they cannot be corrected using the self-correction method.

Source: Belfint.com, April 2017

The Paradox of Participant Loans in Default

Abstract: Keeping two sets of books often means that someone is hiding something from the taxing authorities. However, keeping two sets of books is sometimes a legitimate practice, required precisely to comply with IRS rules that regulate different aspects of each set of books. For example, the difference between deemed distributions of loans in default and the actual loan offset requires a double set of books.

Source: Belfint.com, March 2017

Dispelling an Urban Legend: Participant Loans Do Not Result in Double Taxation

Abstract: Service providers and advisors who claim that participant loan repayments result in double taxation do not see the full picture, so they continue to spread an erroneous urban legend.

Source: Belfint.com, March 2017

How to Avoid Borrowing From Your Retirement Plan

Abstract: Have you ever borrowed from your retirement plan? When you need cash in a hurry, it can be tempting. However, there are a couple of reasons why this may not be the best idea.

Source: Financialfinesse.com, January 2017

401k Loans: Mythbusters Edition

Abstract: There's a fair amount of confusion about how 401k loans work: the payback terms, tax issues, and how much (if any) compounding the 401k borrower actually misses out on. Here are some of the most common myths surrounding the loans, as well as the reality about them.

Source: Morningstar.com, August 2016

Borrowing or Withdrawing Money From Your 401k Plan

Abstract: If you have a 401k plan at work and need some cash, you might be tempted to borrow or withdraw money from it. But keep in mind that the purpose of a 401k is to save for retirement. Take money out of it now, and you'll risk running out of money during retirement. You may also face stiff tax consequences and penalties for withdrawing money before age 59½. Still, if you're facing a financial emergency, borrowing or withdrawing money from your 401k may be your only option. Here's what you need to know.

Source: Captrustadvisors.com, August 2016

Plan Loans -- Whose Money Is It Anyway, and Why Should You Care?

Abstract: Plan loans are popular with both employers and employees, but loans bring with them a number of additional administrative and legal requirements for which the plan sponsor is generally responsible. Improper plan loans are among the most common defined contribution plan compliance errors. This 20-page paper from the Journal of Pension Planning & Compliance the complexity of properly administering plan loans.

Source: Aon.com, August 2016

The Hidden Downsides of a 401k Loan

Abstract: At first, the 401k loan looked like a great option. There's no credit check, the fees and interest rate are minimal, and best of all, the interest would go back into her own account. However, there are also several hidden downsides of 401k loans to be aware of that are outlined here.

Source: Financialfinesse.com, July 2016

Must Participant Loans Be Paid Upon Termination?

Abstract: If the plan (and recordkeeper) permits, loan repayments may continue to be made by the participants; however, if a participant was previously making repayments via payroll reduction, he/she would be required to make arrangements with the recordkeeper for direct repayment via check or electronic payments such as automated clearing house deduction from a participant's bank account.

Source: Plansponsor.com, June 2016

Loan Is Not a Four-Letter Word

Abstract: 401k plan loans may be good for your plan and participants as well. In a new working paper for the National Bureau of Economic Research, Vanguard experts Steve Utkus and Jean Young, along with Timothy Lu of Peking University and Olivia Mitchell of the University of Pennsylvania, demonstrate that loans, if structured correctly, can increase a plan's participation rate, and the great majority of these loans are repaid.

Source: Vanguardinstitutionalblog.com, October 2015

Reducing Leakage to Keep Participants on Track for Retirement

Abstract: Article addresses two ways participants might empty their retirement asset pool and steps that a plan sponsor can take to help prevent participants from negatively affecting their retirement readiness. The two ways are: hardship distributions and distributions after a participant separates from employment.

Source: Pension-Consultants.com, October 2015

The Pitfalls of Taking a Loan From Your Retirement Plan

Abstract: "I might need my money." This is a remark that is frequently voiced by retirement plan participants. Plan loans are one way to ensure access, but, as the author notes, there are several pitfalls related to these 401k plan loans that participants should be aware of.

Source: 401khelpcenter.com, September 2015

Should Plan Sponsors Restrict Access to 401k Loans?

Abstract: The country's retirement savings deficit, estimated by the nonprofit Employee Benefit Research Institute at more than $4 trillion, invariably calls into question the matter of 401k loans and the extent of the toll that plan leakage may be having on Americans' ability to save adequately for retirement. A recent study shows that toll may be much higher than previously thought.

Source: Treasuryandrisk.com, August 2015

Documentation Hardship for Hardships (and Participant Loans, Too)

Abstract: At the present time, it may be impossible for many recordkeepers to transfer the hardship and loan documentation in electronic format to the plan sponsor. But every plan sponsor should probably request it from the recordkeeper and request that the electronic data be transmitted to the plan sponsor with each future hardship distribution and each participant loan.

Source: Benefitsbryancave.com, May 2015

Economists Say 401k Plan Loan Policy Shapes Borrowing

Abstract: Decades into reviewing the pluses and minuses of 401k plans, most employer plan sponsors have chosen to offer plan loans, which on the one hand give participants early partial access to their retirement funds but also threaten to erode those savings. A new paper suggests that plans' loan policy can shape participant borrowing, which may give sponsors a greater sense of control as a 401k lender.

Source: Thompson.com, May 2015

Basic Loans Rules of the Internal Revenue Code and ERISA

Abstract: What are the basic loan rules? The basic participant loan rules originate with the Internal Revenue Code (USC 26) and with parallel sections found in ERISA (USC 29). The relevant sections of these two laws are presented here.

Source: Mhco.com, April 2015

Borrowing From the Future: 401k Plan Loans and Loan Defaults

Abstract: Tax-qualified retirement plans seek to promote saving for retirement, yet most employers permit pre-retirement access by letting 401k participants borrow plan assets. This paper examines who borrows and why, and who defaults on their loans.

Source: Pensionresearchcouncil.org, April 2015

Documentation for Loans and Hardship Withdrawals Must Be Retained

Abstract: Most sponsors of defined contribution plans rely on a third-party administrator to handle participant loans and hardship withdrawals -- typically through the TPA's website. However, in guidance issued last week, the IRS cautions that the sponsor -- not the TPA or the participant -- is responsible for maintaining documents proving that those transactions comply with the law.

Source: Benefitsinbrief.com, April 2015

Required Loan and Hardship Distribution Documentation

Abstract: Does your U.S. retirement plan make distributions to foreign persons? If so, you must generally withhold 30% from a plan distribution paid to a foreign payee unless you can reliably associate the payment with valid documentation that establishes the payee is a U.S. person or a foreign person entitled to a rate of withholding lower than 30%. Here is an overview of the rules.

Source: Irs.gov, April 2015

Fixing Common Plan Mistakes -- Participant Loans in 401k Plans

Abstract: In appropriate cases, under VCP, the plan may correct certain participant loan failures and obtain relief from reporting the loans as deemed distributions under Section 72(p). Article describes how to fix mistakes commonly found in 401k plan loans.

Source: Markleyactuarial.com, March 2015

The 401k Plan Loan Dilemma

Abstract: If you have wondered whether to allow participants to take loans from their retirement plans, you're likely not alone. On the face of it, allowing loans is a good thing because it encourages younger employees to participate in the plan. But the reality of plan loans is very different.

Source: Frenkelbenefits.com, January 2015

Did the Great Recession Lock in Higher 401k Loan Volumes?

Abstract: Participants' 401k loan activity in 2013 was little-changed from year-end 2012, but it remained noticeably higher than before the Great Recession, according to a new report.

Source: Napa-net.org, January 2015

Seven Reasons to Avoid 401k Loans

Abstract: The flexibility offered by allowing loans is often touted as one of the good features of the 401k. However taking a loan from your 401k also carries some downsides. Here are seven reasons to avoid 401k loans.

Source: Thechicagofinancialplanner.com, December 2014

Considering a 401k Loan? Weigh Your Options Before Borrowing

Abstract: Nearly one million 401k investors initiated a loan from their account during the past year. To help pay back these loans, many investors reduce or stop saving in their 401k altogether. But there can be long-term consequences for investors who stop saving, including the potential loss of up to hundreds of dollars in monthly retirement income. Here is a good review on the issue.

Source: 401khelpcenter.com, October 2014

Qualified Plan Loans -- Repayment Upon Termination of Employment Can Be a Hardship

Abstract: If a participant is not able financially to repay a plan loan on termination of employment, it's unlikely she is able financially to come up with the funds to contribute the loan offset amount into an IRA or other employer plan. In Private Letter Ruling 201407027, the financial institution providing administrative services for the plan did not inform the participant of the tax consequences of the loan default. Therefore, the IRS granted him a waiver of the 60-day rollover requirement to allow him to rollover the loan offset amount. That's good news for this taxpayer, but it still leaves many participants caught in a tough spot when they terminate employment with an outstanding plan loan.

Source: Benefitsbryancave.com, April 2014

Examining 401k Plan Loans' Upsides and Downsides

Abstract: Allowing 401k plan participants to take out loans against their account balances has always been a double-edged sword. Although 401k loan-takers are expected to pay the loan back with interest, chances are good those assets would have earned a higher return by being invested in the financial markets.

Source: Shrm.org, February 2014

Borrowing From the Future: 401k Plan Loans and Loan Defaults

Abstract: Most active 401k plan participants have the option of borrowing from their retirement accounts, and nearly 40 percent do so over a five-year period. Paper shows that employers' loan rules have a strong endorsement effect on borrowing patterns; that is, in plans allowing multiple loans, participants are more likely to borrow and take out larger loans. Also notes that defined contribution retirement plans, while designed mainly to support old-age financial security, include important features for financing current consumption.

Source: Pensionresearchcouncil.org, February 2014

Many Have Access to 401k Loans, Few Have Outstanding Balances

Abstract: While most 401k plan participants are able to take a loan from their 401k account, relatively few do -- and this has been a consistent pattern that has held for nearly two decades. According to an analysis released by the Employee Benefit Research Institute, 87 percent of participants were in plans offering loans, but only 1 in 5 of those eligible for the loans had one outstanding.

Source: Ebri.org, January 2014

Grab the Money and Run? Retirement Plan Loans and Hardship Distributions

Abstract: This is 23 slides prepared by the IRS, and used at the 2013 Nationwide Tax Forum, which provide an overview of 401k loan and hardship withdrawal regulations. Topic include: tax rules for plan loans and hardship distributions, tax consequences, loan defaults, and prohibited transactions.

Source: Irs.gov, November 2013

Minimizing Defined Contribution Plan Loan Leakage

Abstract: Recent studies have illuminated the problem of defined contribution plan leakage and the negative impact it has on retirement income savings. One prominent source of plan leakage is loan defaults which primarily occur when a plan participant with an outstanding loan terminates employment. This paper outlines four actions plan sponsors can implement to decrease DC plan loan leakage.

Source: Aon.com, October 2013

A Long Hot Summer for 401k Loans

Abstract: As the weather heated up this summer, so too did the discussion on participant loans from DC plans. At least a handful of financial news sites have published pieces critical of participant loans. With information often comes misinformation and, accordingly, some clearing up is in order. Here are a few recently heard statements -- in both pro-loan and anti-loan flavors, culled from participants and analysts alike -- and the facts behind them.

Source: Retirementtownhall.com, September 2013

Is Your 401k Loan Program State-of-the-Art?

Abstract: Many recent studies have shown that major obstacles to employee attainment of retirement readiness include the loss of account balances due to loan defaults and hardship withdrawals. This account leakage can be reduced by a well-managed participant loan program. This article describes the characteristics of a state-of-the-art loan program.

Source: Benefitnews.com, August 2013

Reasonable Interest Rates for Participant Loans

Abstract: 401k participant loans have become the subject of increased attention by the DOL and IRS. The regulations promulgated by both agencies require that certain conditions be satisfied in order for the provision of such loans to be permitted without any financial or other penalties. This includes the requirement that the loans bear a reasonable rate of interest. How to determine what is “reasonable” has been a frequent question among plan practitioners and sponsors. This article seeks to clarify the issue.

Source: Unitedretirement.com, August 2013

Loans From Tax Qualified Retirement Plans

Abstract: This is a 19 page detailed review of the law around loans from tax qualified retirement plans including IRC Section 72(p) which provides guidance in designing and implementing a plan loan policy.

Source: Wickenslaw.com, July 2013

How to Reduce Employee Cravings for 401k Loans

Abstract: For many plan sponsors the revolving door of 401k loans is an all-too-familiar issue. As technology has evolved, initiating a participant loan is as easy as a few clicks of the mouse. No credit checks, I’m borrowing my own money and paying myself back the interest, no creditors calling me if I default … how bad could it really be? But the opportunity cost of a 401k loan in many cases can be substantial even if employees pay it back. Plan sponsors should consider some options to limit the amounts of loans while still offering them.

Source: Benefitnews.com, May 2013

Infographic on Retirement Plan Loans, Withdrawals and Distributions

Abstract: Learn the basics about the loan, withdrawal and distribution options available in your retirement plan along with some interesting statistics on Americans pulling funds from their retirement accounts with this infograhic.

Source: 401khelpcenter.com, February 2013

Plan Loan Administration

Abstract: These are the slides from a webinar on Plan Loan Administration. Topics covered include, loan basics (advantages/disadvantages, regulatory framework), loan requirements (including limits, documentation, etc.), repayment requirements, leaves of absence, loan default and distributions, and administrative issues and correction options.

Source: Morgan, Lewis & Bockius LLP, April 2012

Participant Loan Request Form

Abstract: This is a sample participant loan request form.

Source: Plan Design Consultants, January 2012.

Best Practices for Reducing Loans, Hardship Withdrawals, and Impulsive Investment Decisions

Abstract: Negative behaviors such as using the 401k plan as an emergency fund instead of a long-term retirement savings account and taking excessive loans and hardship withdrawals is a symptom of a bigger problem among the employee population. The same is true for impulsive investment decisions that could ultimately delay employees' retirement. A combination of plan design and financial education works well to improve employees' financial wellness by casting a wider net in order to help employees help themselves without feeling pushed.

Source: 401khelpcenter.com, October 2011.


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