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

Employee Benefit sponsors aren't required to offer 401k loan lending features, but, most do.
With concern to administration, loan programs may be the least desirable feature and the most intensive workload concerned with administering 401(k)s. Discrepancies can be discovered between the payment schedule required for the obligation and the amortization schedule shown by the enterprises payroll administrator and these possible can be left undiscovered till a retirement program is questioned by the IRS. This can create a huge problem that may be problematic for an employer to fix.
401(k) loans are no holiday for staff either; possible they may look at many hard calculations when opting to sign up for a loan and many times they don’t quantify substantially what it means to them financially, either over time or at this moment, and how this will affect the future.
Plan on not offering loan programs to workers unless it is politically necessary in order to persuade the staff to belong to the 401(k) plan to start with. Employers that do offer 401 k loans can design rules to minimize all the admin problems and the likelyhood of misuse by employees that such features may show up. Discuss the following:
- Confine the staff to one benefit loan at once. Companyies that have allowed two loans concurrently agree that it is far more difficult to administer while attempting to keep track of which repayment belongs to which loan file. It has been shown that there is decidedly more potential for mis-management by recipients.
- Make it a rule that participants wait a period of time after repaying the loan – perhaps six months – until the staff members are permitted to source another one. Workers can use loans as a ongoing crutch and it ends up negating the reason for having a retirement savings benefit.
- For recipients in extreme cases the employer can allow loans only for the same limited problems that the IRS allows a hardship withdrawal from a 401(k) plan. Maybe to pay for un-reimbursed medical bills or to stop a worker losing their home. Also, even though staff are paying themselves interest, by mandating the interest rates higher it can serve as a deal breaker and may prompt them to request other loans with their banks.
Lastly, businesses can always do more to educate their recipients concerning the unseen repercussions of sourcing loans from their 401(k) plans. Maybe giving advice on the tax problems and the payback provisions as well as the long-term reduction a loan program can have on the earnings of their ultimate benefits. Companies may wish to devote dedicated resources to explaining to their workers the good sense of staying in their plans as they do in pursuading staff to join.

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

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