A participant plan on retireing this year. She currently has an outstanding loan in her employer's 401(k) plan. The loan program states that loans are repaid through payroll deduction. There is no other option. This is a large plan with numerous loans and the employer does not wish to handle loan repayments outside their payroll system. The participant does not wish to request a distribution from the plan until after the end of the 2000 tax year. She would like to continue to make her loan payments to the trust. She does not wish to take the loan as a partial distribution nor does she wish to default on the loan. The loan program states that loans are considered to be in default after 60 days from the date a payment is missed. What are her options?

She could take a total distribution, roll over the non-loan portion directly, and make an indirect rollover contribution in the amount of the outstanding (taxable) loan amount, effectively repaying the loan into a tax-deferred vehicle (the IRA).

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Jon C. Chambers
Principal
Schultz Collins Lawson Chambers, Inc.
(415) 291-3004

The loan provisions don't say anything about allowing the participant to pay off the loan early? Also, I'd check the language regarding terminations. Some loan policies include provisions that termination of employment constitutes a default. I agree with Jon...it doesn't seem she has a lot of options with the current plan. She'd be liable for the tax on the O/S principal, but that's it. Question: why repay the loan to the IRA?

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I agree that it would be very unusual for a loan note not to provide for repayment in full at any time, or to cure a potential default situation.

Nonetheless, if that's the case, I further agree that unless the existing employer allows for the direct rollover of the loan and the new employer (or IRA) accepts the direct rollover of a loan, the only option is for employee to indirectly roll over (taking cash out of his pocket) the taxable loan amount.