What happens if a participant with an outstanding loan balance terminates employment?
A participant with an outstanding loan balance who terminates employment has two options: • He/she can pay the outstanding principal and interest back in a lump sum before requesting a lump sum payment This action allows the participant to avoid paying taxes on the outstanding balance. • He/she can “cancel” the loan. This means their account will be offset by the outstanding loan amount when a distribution from the account is processed. For example, Jackie Wood has a vested account balance of $20,000 including an outstanding loan balance of $5,000. She terminates and requests a lump sum distribution without paying back the $5,000. NADART will deduct the $5,000 leaving her vested balance at $15,000. NADART will then withhold 20% of the $20,000 for federal income taxes. Her check amount would be $11,000.
Related Questions
- What happens to the loan balance in a 401(k) plan when the participant dies and the account is to be split between two non-spouse beneficiaries?
- What happens if a participant with an outstanding loan balance terminates employment?
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