Question: We had two participants leave our company this year with outstanding 401(k) plan loans. We’ve heard the tax law passed in December 2017 may impact those loans. What can you tell us?
Answer: You heard right; there is a provision in the Tax Cuts and Jobs Act passed December 22, 2017, that affects plan participants who terminate employment with an outstanding loan. Before passage of the law, the loan would have been due immediately. Former employees who could not repay the loan within 60 days would have the outstanding balance deducted from their account balance and treated as a taxable distribution. The Tax Cuts and Jobs Act included a provision extending the repayment due date.
Now, to avoid inclusion of the outstanding balance in taxable income, the loan must be repaid by the date the participant’s federal income tax is due. There are a few important housekeeping items associated with this change. If your plan allows loans, be sure to update the plan document, the plan’s loan policy and the required notice of rollover eligibility so they reflect the update.