I have a 401k client whose plan allows for loans and hardships. The only source of funds in the plan are salary deferrals. This client has a participant who has already taken a loan and now wants to take out the rest of his money. The participant claims he doesn't fall under the hardship rules but says it's his money so why can't he have it?

The client is considering adding the in-service distribution provision so the participant can get his money but when I told him the participant would need to continue paying back the loan, he went ballistic and said that didn't make sense.

I figured the participant made an agreement to take a loan against his account balance and just because in-service provisions are added to the plan that doesn't negate the loan agreement. Am I way off base on this? Does the participant stop making the loan payments and then get 1099'ed for the entire amount at the end of the year?

The participant would have to be 59.5 to take an in-service on 401(k) deferrals.

No.