401k termination question

[Buzz123]

Georgia

Employer is terminating our 401k plan, and not replacing it. What happens to people with 401k loans? I know they will have to pay taxes, but do they also have to pay the 10% penalty since this is involuntary on the employee's part? Is there any way around this?

The question is for employees under 55 and with more than $5,000 in the plan.

 

[FlyingRon]

You have 60 days to pay it back or you have to treat it as a early distribution (tax + penalty). That's one of the big risks of such loans. The rest of the plan amount can be rolled over into another qualifying plan (IRA, etc...).
I don't see any dispensation for yours. On the brighter side, the employer's contributions should be come fully vested on the plan termination.

I'm not a tax expert though. You should hang on until Ldij gets here.

 

[tranquility]

I agree with FlyingRon with the exception of the 60 days. The Plan will have its contractual time line for when there is a determined (deemed) distribution for the outstanding loan amount. While the 60 day limit on rollover is important, it is not the only time line.

See:

http://www.ustaxcourt.gov/InOpHistoric/Tilley.SUM.WPD.pdf

for an example of how such things are handled.

 

[davew128]

And a reason why at a former employer when I got stuck administrating a client's 401(k) that I highly recommended eliminating the option of a plan loan. Not only is it a major PITA, both employees who took out loans left the company before repaying and complained about the 1099-R for the deemed distribution afterwards.