Common But Costly Mistakes In 401(k) Plan Loans

Many 401(k) plans allow participants to borrow amounts from their vested 401(k) plan accounts and repay such amounts, typically through payroll deductions, back to their own accounts.  Plan loans must comply with IRS rules which govern the amount of the loan (lesser of $50,000 or 50% of the vested account balance), the loan term (5 years unless used to purchase the participant's principal residence), loan repayments (must be substantially level), and interest rates (must be reasonable).

Participant loans are often pre-approved other than home loans which require extra administration and documentation.  Participants can apply on-line or call the 401(k) plan service provider to request a loan.  The approval process is short and participants often receive loan proceeds within 7 – 10 days following loan initiation.  This means that loan repayments must be set up quickly in the employer's payroll system.