It took out a 4 year loan for $20,000 from my 401K in April of this year (2008). The deal was made over the phone with the 401K management company. The company told me they would notify payroll and I did not need to do anything more. On the cover letter accompanying the check the management company stated payments would be deducted from payroll.

Six months later, I learned from my employer that no payroll deductions were applied against the loan that the loan was in default. This is despite the fact that for the year, I had already had about $19,000 in payroll deductions sent to my 401K. (Apparently the 401K and the 401K loan are two different things. They say I should have known that from my check stub.) A 1099 had been sent to the IRS and the 20K that was a loan now becomes a distribution that is subject to penalties and taxes. I received no notice of the overdue loan until after the default occurred two weeks ago.

After many long and heated sessions on the phone with the 401K management company, I was eventually told that since I was still an employee with the company that the company could use the IRS's Voluntary Compliance Program (VCP) to correct the error. The management company still accepts no responsibilty telling me they sent a "feed" to my employer. Basically this means it would have appeared on a page at the management site if they had bothered to look at it. Since my employer tells me they have never had a 401K load before and were not notified, they didn't know to go look at the page. The management company tells them that is their fault.

I was just told by my company that after they looked into the VCP they decided the fees charged were more than a small company like ours was willing to pay. They told me they are sorry, but I am left to deal with it on my own.

Right now I face about $10,000 in taxes and penalties as a result of the oversight. My employer and the 401K management company accept no responsibility.

Are they correct that this is all my fault?

Do they have any responsibility to correct the error?

What leverage, if any, do I have to persuade them to do so?

Some of what you are asking was recently discussed at length in this thread

Doesn't look like it's your fault from your recitation of the facts, but, whether or not it's your fault, the consequences of the error certainly are yours. And, you can't fix under VCP without your employer's cooperation.

You could let your employer know that you intend to call the DOL claiming that the employer, as ERISA administrator, failed to monitor the plan to determine if the loan was being repaid, and therefore breached its fiduciary duty. Perhaps that will wake them up a bit.

It is unfortunate and certainly enough to make anyone angry. But the fact that you did not notice that no loan payments coming out of your check is NOT the fault of your employer or the firm administering the plan. The paperwork you received should have told you the amount of each payment. When your paycheck continued without being lowered by that amount, you should have inquired about it.

P.S. I just noticed your name is the same as someone I used to work with. Is the employer in question a magazine publisher? If so I might have some tips on dealing with the individuals involved.

The design of a pay stub is beyond the control of the employee.

If a pay stub has only 1 line for 401(k) deductions, the employee has no way of knowing what the deduction is for. Employees usually assume that "regular' deductions are relatively accurate and do not compare the entries on each pay stub with copies of time sheets, order slips, salary reduction agreements etc.

We do not know how much info regarding 401(K) salary deductions etc are on this pay stub, so we do not know how much this employee is to blame for not having noticed that there was n change in the amount of the deduciton, assuming that there was a noticeable change in amount.

As a result I am hard pressed to immediately start blaming this employee or even assigning any fault to anyone, without more details.
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Mark

See if the management company will give you a copy or proof of what they used to notify your employer. They might never have been properly notified.

I do not see how corrective steps can be taken without knowing where the system failed.

I also would get a copy of the SPD and the Plan Document to see how the employer wassupposed to treat a loan payment delinquency etc, how a loan default is treated and when the 1099 should be issued. I feel that it is quite possible that proper procedures were not followed. I also questionwhether or not the 1099 should have been issued so quickly, but I really do not know.

You should have this info before you threaten to or call the DoL etc just to make sure you are coherent and have some basis for complaining. A clear position always appears stronger than a vague one.

If this is the only loan ever taken from the plan, why wouldn't they be able to correct using SCP instead of VCP? Even if there are few enough participants that one is a significant percentage, he is still within the SCP correction period for significant operational errors.



Mark,

Did they send you any paperwork with the loan check that listed a payment schedule?

Kevin -- A proper loan correction under these circumstances (e.g., through reamortization over the remaining portion of the period, or over 5 years) can only occur under VCP (EPCRS Section 6.02(2)(a)), so SCP is not available.

K2 -- I agree with you that the employee certainly is not blameless for this situation continuing for so long. Nevertheless, this fits into VCP despite that fact.

Larry, I agree.

George, if you pay your staff well enough that a payment on a $20,000 loan would not make a noticeable difference in their take home pay, where do I send my resume?

I have a freeze on hiring and it is fee sharing only but would reconsider for someone with a number of CEO contacts at large companies. I have no full--time staff but I have a few professonals on retainer who work as needed but almost everyone else get paid for referrals that become clients (sales). None would have noticed unless idly nit-picking.

I do not know how prevalent or legal it is, but I have seen pay stubs from 401(k) participants who reduced elective deferrals to the minimum for employer matching and used the difference in reduction (plus a little extra) as loan repayment. Thus the impact was negligible especially if earnings fluctuate with OT or commissions etc. I do not know how much impact a $20,000 loan would have in that scenario or this.