Should We Deny a 401(k) Loan Based on an Expectation of an Employee’s Termination?

DWC | 09/12/17

401k_Loan_Rules.png

Facts

One of the participants in our 401(k) plan just applied for a loan for $25,000. He has enough in his account to support the loan, but there is a bit of a wrinkle. We are planning to reorganize the department he works in, and his position is scheduled to be eliminated in about a month.

Question

Can we decline his loan request based on the expectation that he will not be employed with us for much longer?

Answer

That is a real “between a rock and a hard place” situation.

We’ve never seen a policy that restricts access to participant loans based on an expectation of future employment for a set period of time. It’s a bit of a slippery slope. What if the expected employment termination date is six months down the road? This is a relatively large loan request. If it is for the purchase of a primary residence and will be amortized over 30 years, what if the termination is expected to occur in a year? And looking at it from the opposite direction, does the company’s approval of other loan requests somehow suggest an ongoing right to continued employment?

The gist is that denying the loan based on an expectation of continued employment introduces a level of subjectivity that we don’t believe is an appropriate part of the equation.

The facts presented suggest that the individual is still actively employed and meets all of the objective plan criteria to be able to take the loan he has requested. We do not see a basis to deny the loan request.

For more information on participant loans, please visit our Knowledge Center here.

Submit Your Question Today

  • Share
  • Share on LinkedIn
  • Share on Facebook
  • Share on Twitter

Topics: Question of the Week, Participant Loans

The views expressed in this blog are those of the authors and do not necessarily represent the views of any other person or organization. All content is provided for informational purposes only and is not intended to be tax or legal advice.