Should Your Company Offer 401(k) Loans to Employee?

Posted by writer on November 23rd, 2008 at 06:20pm

Benefit Plan sponsors are not compelled to offer 401k loan lending plans, but, many do.
With all due respect to administration, borrowing features may be the most unpopular option and the biggest requirement concerned with administering 401(k)s. Discrepancies can be discovered between the repayment schedule required for the debt and the repayment schedule created by the enterprises payroll benefit administrator and these possible can be left undetected until a 401k loan plan is questioned by the IRS. This can represent a huge problem that may be costly for an enterprise to solve.
401(k) loans are no holiday for workers either; possible they may face many hard calculations when electing to source a loan and frequently they do not understand exactly what it means to them financially, either over time or at this moment, and how it will affect their future.
Suggest not offering loan benefits to employees unless it is politically required in order to persuade them to opt for the 401(k) plan to start with. Companies that do offer 401k loans can impliment measures to reduce the administration pain and the likelyhood of abuse by workers that such features may generate. Discuss the following:
– Restrict the employees to one loan at a time. Companyies that have allowed two loans concurrently agree that it’s exponentially more fraught with difficulty to administer while attempting to keep track of which payment belongs to which loan. They have discovered that there is surprisingly more potential for mis-management by recipients.
– Make it a consideration that workers wait a period of time after paying off the loan – perhaps six or more months – until the staff members are allowed to take out another loan. Employees can use loan access as a permanent support and it ends in throwing out the whole purpose of having a  plan.
– For recipients in hardship cases the employer can negotiate loans only for the same limited circumstances that the IRS considers a bad circumstance withdrawal from a 401(k) plan. When necessary to pay for not covered medical costs or to prevent a member losing their residence. Also, even though workers are paying themselves interest, by mandating the interest above other sources it can serve as a deterrent and may convince employees, workers, staff to look for other options with their lenders.
Lastly, enterprises should always do more to educate their staff concerning the possible drawbacks of accessing loans from their 401(k) plans. Maybe advising on the tax problems and the repayment conditions as well as the long-term reduction a loan program can have on the capital of their retirement savings plan. Enterprises would do well to devote dedicated resources to detailing to their workers the good sense of following their plans as they do in encouraging workers to participate.

Ensure your company provides the best advice. Call a qualified Benefit Consultant TODAY. Visit Benefit Consultants for more information.

About The Author:

BenefitConsultants.com is a site where you may find qualified benefit consultants to assist you in finding and pricing a plan for your company.

Tags: 401k, 401k contribution, 401k Loans, 401k plan, deferred compensation, retirement plan, retirement planning, retirement plans

Under General