Forgot your password?



NAGDCA Note: The Basics of Offering Loans

Offering loans may encourage employees to participate in a retirement or deferred compensation plan, as they are comforted by knowing their assets will be available to them to borrow, if necessary. Plans are not required to offer loans, but if they are offered, the plan sponsor, in conjunction with its plan administrator, should develop a loan policy and a set of forms for documenting the loan including a loan application form, amortization schedule, loan note and disclosure statement, and a loan repayment history.

Things to consider when developing a participant loan policy:
• How to determine the interest rate
• Who will process the loan documentation
• What default provisions to include in the policy
• How the collection process will function

Guidelines and Rules

Loans should be made available to all active employees on an equal basis. Loans may be made available to employees on leaves of absences or beneficiaries but this is not required. Generally, loans are not available to employees who have separated from service since they have general access to their accounts.

The purpose of the loan or the participant's ability to borrow the same amount from another source is irrelevant in determining whether the loan requested by a participant is granted, unlike hardship or unforeseeable emergency withdrawals. Information on Unforeseeable Emergencies and Hardship Withdrawals can be found on the NAGDCA website at:

IRS regulations permit plan participants to borrow up to 50% of their vested plan balance or $50,000, whichever is less. The $50,000 loan maximum must be coordinated with loans from other retirement plans sponsored by the employer, including a 401(k) or 403(b) plan and the employee's defined benefit plan. Loans or the combination of multiple loans in excess of the $50,000 maximum may be subjects to income taxes.

Plans may choose to have more restrictive guidelines. An exception may be made to allow employees to borrow up to $10,000, even if this exceeds the 50% limit. If the plan allows multiple loans, the new loan cannot cause the total outstanding balance of all loans to be more than the plan maximum amount and a participant can't borrow from a plan more than once a year.

Regulations require loan repayments to be made at least quarterly and in level amortized amounts that include principal and interest. The loan repayment period for a general purpose loan cannot exceed five years. A loan to be used towards the acquisition of the participant's primary residence may be repaid over a period not to exceed 15 years. Loan repayments are not plan contributions but are credited to the participant's account and the balance of their account is increased by the amount of the repayments.

Loans may be paid off in full at any time prior to the original due date. This is typically accomplished by the participant asking for a current pay-off amount and sending a check or money order directly to the plan's record keeper. Balloon payments are not acceptable for plan loans unless it is to pay the loan off in full.

The loan repayment schedule may only be modified in two instances. The loan of an employee who is on an unpaid leave of absence or a leave of absence with pay but the amount of pay is insufficient to make the loan payment may be suspended during the leave period, not to exceed one year. In this instance, the loan repayment process must restart when the leave of absence ends and the loan must still be repaid within the originally scheduled time frame. However, the loan may be re-amortized or the, the employee can make a lump-sum payment at the end of the loan repayment period.

The loan repayment period may be also suspended for a member of the armed forces during the period they serve on active duty. When the participant returns from active military duty, the repayment period may be extended for an amount of time the participant was on active military duty. The loan repayments, however, cannot be less than the original scheduled amounts and frequency.

A plan may require participants to make loan payments through payroll deductions.

Loans are not considered a reportable or taxable transaction unless there is a default or the loan amount exceeds the maximum permissible loan. The plan's terms should indicate when a loan is deemed to be in default. Generally, if a participant misses a payment prior to the default period, payments can be made to bring the loan repayment up-to-date. Failure to repay the loan in accordance with the loan's repayment and default term will result in a default and a deemed distribution.

A loan that is in default status is considered a deemed distribution, which means the defaulted amount is subject to income tax. If a loan which is defaulted is taken from a qualified plan such as a 401(k) and the participant is under the age of 59 ½, the defaulted loan amount may also be subjected to the 10% early-distribution penalty. If a plan permits loans subsequent to a default, there are special IRS requirements that require any subsequent loan to be paid through payroll deductions or additional collateral to be provided by the participant.

The plan sponsor may require that a plan loan be repaid in full when the participant severs employment with the employer. If the loan is not fully repaid, the plan sponsor will treat the amount of the unpaid loan as a distribution and report it to the IRS. Income tax consequences can be avoided if the employee is able to pay the loan's outstanding balance in accordance with the plan document, which must be within 60 days of termination.

Neither NAGDCA, nor its employees or agents, nor members of its Executive Board, provide tax, financial, accounting or legal advice. This memorandum should not be construed as tax, financial, accounting or legal advice; it is provided solely for informational purposes. NAGDCA members, both government and industry, are urged to consult with their own attorneys and/or tax advisors about the issues addressed herein.

IRS Code 72(p)

IRS - Retirement Plans FAQs Regarding Loans:,,id=162415,00.html#3  

Lesser, Gary S. 457 Answer Book, Third Edition. New York: Panel Publishers, 2002

Department of Treasury - Loans from a Qualified Employer Plan to Plan Participants or Beneficiaries: 


201 East Main Street, Suite 1405
Lexington, Kentucky 40507
Phone: 859.514.9161

Copyright © 2018 National Association of Government Defined Contribution Administrators, Inc. NAGDCA
Site designed by AMR Management Services
Terms Of Use | Privacy Statement