Can a plan sponsor suspend loan repayments for an employee who is temporarily on an unpaid leave of absence or had work hours reduced?
Possibly. When plan document terms or loan procedures allow suspension, payments may be temporarily stopped when an employee is on a leave of absence, either without pay or at a rate of pay that is less than the amount of the installment payments required under the terms of the loan after applicable employment tax withholdings.
The following requirements should be met:
- The loans suspension period must not exceed one year.
- The loan must be repaid by the end of the original term of the loan.
The loan payments missed during the leave may be repaid by either continuing the original rate of repayment, with a balloon payment of the missed installments at the end of the term, or by ratably increasing the installments during the remainder of the repayment period. Note: The second requirement poses potential practical problems if a participant is placed on a leave near the end of the original term of the loan, so caution is advised.
If the plan doesn’t offer a suspension option, it may be added in operation so long as the document is amended before end of plan year.
Care should be taken to distinguish between a leave of absence and a termination of employment. The plan sponsor should review this carefully with their retirement plan consultant.
Cetera Retirement Plan Specialists is a third-party administrator and may not offer tax, legal or investment advice. Plan sponsors should consult their own tax, legal or investment professionals.