See section 14 of your adoption agreement to determine if the firm elected to allow for loans in the plan.
Actively employed participants should have their loan repayments deducted from their paychecks so the loan frequency requested should match your payroll schedule.
Terminated participants are permitted to repay their loans directly to the Program (as long as you don’t have a stricter loan policy that requires that the loan be repaid in full upon employment termination). To do so, they can submit a check payable to ABA Retirement Funds Program along with a Loan Repayment Remittance Form. While they should stick to the loan payment frequency originally chosen, they can reamortize the loan to a more convenient payment frequency (such as monthly or quarterly) using the Loan Reamortization Request Form.
The loan check is sent to the firm for this reason and so that you can establish payroll deduction for the correct repayment amount. If the wrong payment frequency was chosen, you can reamortize it by submitting the Loan Reamortization Request Form.
Determining if a default has occurred
Important. If a participant has more than one loan in default, you may complete one Loan Default Form for all loans.
According to the Internal Revenue Service (IRS), a loan is in default if:
- A loan payment is not made by the end of the calendar quarter following the quarter in which payment was due, or
- A loan is not paid in full by the date on which it was due to be paid in full.
Reports you will receive
The Program is responsible for acting on defaulted loans. However, you have responsibilities as well. You will receive a monthly Loan Report from the Program. The Report includes:
- The names of all participants with outstanding loans in your firm’s plan, and
- The last payment date for each loan.
You should use this Report to monitor the status of participant loan repayments and to make sure the information on the Report is correct. This Report can also assist you in ensuring that payments are up to date and that terminated participants are still making repayments as required.
Warnings to participants
On the first business day of each quarter (i.e. January, April, July and October), the Program will issue a loan default warning to a participant if his or her loan is in danger of defaulting.
The Program will issue a second loan default warning on the first business day of the third month of each quarter (i.e., March, June, September and December).
Interest and IRS Reporting on defaulted loans
Interest continues to accrue on the outstanding amount of a defaulted loan. In addition, if the unpaid amount is not repaid within the applicable grace period allowed by the IRS, the Program will report to the IRS the outstanding amount of the loan and the outstanding interest as a taxable distribution, meaning it is subject to taxes and any applicable IRS penalties. After the loan is reported as a taxable event, it will continue as outstanding debt to the plan and continue to accrue interest. The taxable event does not extinguish the loan.
Complete and send Loan Default Form to the Program
The Program will process a loan default when it determines a default has occurred (loan defaults occur on a quarterly basis). However, if you determine that a plan loan is in default, you may complete a Loan Default Form to have a loan defaulted at any time. Then, send the form to the Program using one of the methods provided under “Mail & E-mail” in the Forms, Tools and Resources section of the Guide.
Instructions for Completing Loan Default Form
- You complete the employer information that relates to the plan.
- You complete the participant information.
- You complete the loan information:
- Date of loan
- Loan number
- Original loan amount
- Whether participant has terminated employment
- The authorized plan representative signs and dates the Form.
The Program will process Loan Default Form
upon receipt of a properly completed and signed Form. The Program will notify
the participant that the loan is considered a taxable distribution. In January
of the following calendar year, the Program will mail the participant an IRS
Form 1099-R reporting the taxable distribution. Note that the outstanding
balance of the loan will continue to accrue interest and will appear on the
participant’s quarterly statements until such time as it may be repaid in full.