A 457b governmental (non ERISA) plan has a loan program that allows one loan. A participant sent in an ACH payoff of the first loan and a second loan was issued. However, the payoff had insufficient funds and did not go thru. Now the first loan has been reinstated resulting in two loans, a loan program violation. Participant refuses to payoff first loan. What is the remedy - default the first loan, but then technically the second loan should be payroll deduction and it is not. Also two loans are not allowed, but I do not think the IRS or ERISA Prohibited Transaction rules apply to these plans.

Would you not have a failure to follow the terms of the plan? Could a corrective amendment be done where the participant refuses to payoff the first loan, but then all participants would be allowed a second loan and the sponsor may not go with this idea. Is the payoff of the first loan a small balance?

I don't see an easy solution, however maybe it's possible to take some of the payment from Loan 02 and payoff Loan 01 quickly and refinance Loan 02 to a longer term (if possible) so that the remaining payments will fit into a new term.

This is all somewhat klunky work for a non-cooperative participant.