When performing year-end reconciliation and review procedures for a 401(k) plan, plan sponsors should be sure to include a review of participant loans. In addition to reconciling loan repayments from payroll to the plan’s record-keeping statements, plan sponsors need to ensure that all loans have been properly set up in payroll and continue to be withheld for the life of the loan. Too often, we find participant loans that were never set up in payroll or where payroll withholding of repayments ceased prematurely, resulting in defaulted participant loans.
The good news is that plan sponsors can fix this if caught early enough. Rev. Proc. 2021-30 provides for self-correction of this type of plan loan failure. For calendar year-end plans, plan sponsors have until March 31 of the following year to correct the failed set up of a participant loan. The acceptable correction methods are:
- The participant makes a single lump sum corrective payment of the payments missed to date (and the remaining loan payments continue on schedule based on the original payment schedule);
- The loan (including accrued interest) is re-amortized over the remaining life of the original loan (final payment date is not extended);
- The loan (including accrued interest) is re-amortized over the remainder of the maximum life of the loan if the loan was eligible for a longer period than what was selected. (For instance, if the original loan was over 3 years, but was eligible for 5 years, the remainder may be re-amortized through the date that is 5 years from the original start date of the loan.);
- A combination of a single lump sum payment and re-amortization, as long as the maximum permitted life is not exceeded.
If you are a plan sponsor, don’t neglect your fiduciary responsibility for appropriately administering plan loans. For questions, please contact our Retirement Plan Services Team or our Employee Benefit Plan Team.