Your plan most likely requires that the loan is repaid upon termination of employment, or within the quarter following the quarter of the termination date. Failure to do so will cause the loan to go into default. It will then be treated as taxable income to the participant in the year the default is made. The participant is responsible for income taxes, as well as any applicable penalties. Most of the Loan Programs written by Paragon state that the outstanding loan balance is due and payable upon termination of employment.
The loan repayments will need to be withheld from the employee’s pay on an after-tax basis. You need to notify your payroll department of the after-tax repayment amounts and the target date for the final repayment. The repayments will need to be forwarded to the record keeper along with your contributions. You will also need to clearly label the loan repayments on the allocation listing to your record keeper so they are applied to reduce the outstanding loan amount.
Typically no; however, it depends on the plan document terms in both your old and new employers' plans. If both plans allow loan transfers, we would need the new employer plan contact information. Generally most plans sponsored by Paragon do not allow loan transfers for employees who terminated service with our clients. However, we do have the ability to incorporate loan transfers into our plans. Since loan transfers entail significant time and possible expense, the most common reason to use this provision would be with an acquisition where the selling and acquiring company are working together to help participants in a mutually beneficial manner.
You must completely repay the loan before the loan goes into default and always before you take a distribution from the company you are leaving.
The Internal Revenue Service (IRS) governs plan loans. Since most retirement plan money has not been taxed, the IRS wants to ensure that loans are not abused in a way that allows employees to avoid paying taxes on funds they receive. Both your old employer and your new employer face substantial financial penalties from the IRS if they do not properly follow these rules. Do not expect this to be as simple or quick as transferring funds between bank accounts. Your employers have a duty to follow these rules and protect the tax benefits of their plans for all their employees. Remember that the primary purpose of the plan is save for retirement and the loan is an option, not a requirement in retirement plans. There are many plans that do not allow employees to take loans because they want their employees to have as much as possible for retirement.