PARTICIPANT LOANS—REPAYMENT AND DEFERMENT OPTIONS
Repayment of participant loans is usually made by payroll deduction. For departing employees, this presents a problem because any unpaid loan balance may have to be treated as a non-cash distribution of benefits to the employee that is subject to income tax and possibly a ten percent early distribution excise tax.
Consider placing employees on an unpaid leave of absence, or a furlough, rather than terminating employment. A furlough can postpone the participant's loan repayment obligation for up to one year. Also bear in mind that participant loans can be repaid from severance compensation if permitted by the plan's loan guidelines and severance compensation is not limited to just highly compensated employees.
Employers may want to consider adding an in-service distribution provision to provide continuing and furloughed employees with access to their 401(k) benefits prior to termination of employment.
Continuing employees with reduced work schedules may want to reduce or suspend their 401(k) contributions for the balance of the year, take out a participant loan, or make a hardship withdrawal if permitted by the terms of the plan.