Should Your Company Offer 401(k) Loans to Employee?
Should Your Company offer 401(k) Loans to employees?
Plan sponsors are not required to offer loan programs, however, a majority do.
With respect to administration, loan programs may be the least desirable feature and the biggest burden associated with administering 401(k)s. Discrepancies can be found between the amortization schedule created for the loan and the repayment schedule created by the company’s payroll administrator and these may be left undetected until a retirement plan is audited by the IRS. This can create a nightmare that may be costly for an employer to remedy.
401(k) plan loans are no holiday for employees either; they may face a host of difficult calculations when deciding to take a loan and often they don’t understand exactly what it means to them financially, either long-term or short-term, and how this will impact their future.
Consider not offering loan programs to employees unless it is truly deemed necessary in order to persuade them to participate in the 401(k) plan to begin with. Companies that do offer loans can take measures to minimize both the administrative pain and the potential for abuse by employees that such programs may generate. Consider the following:
- Limit the participants to one loan at a time. Companies that have allowed two loans simultaneously agree that it is exponentially more difficult to administer while trying to keep track of which payment belongs to which loan. It was also discovered that there is much more room for abuse by employees.
- Make it mandatory that participants wait a period of time after paying off the loan – perhaps six months – until they are permitted to take out another one. Employees can use loans as a permanent crutch and it ends in defeating the whole purpose of having a retirement savings plan.
- For employees in extreme cases the employer can permit loans only for the same limited reasons that the IRS will allow a hardship withdrawal from a 401(k) plan. Perhaps to pay for un-reimbursed medical expenses or to prevent an employee losing their home. Also, even though employees are paying themselves interest, by setting the rates higher it can act as a deterrent and may prompt them to explore other options with their financial institutions.
Lastly, employers can always do more to educate their employees regarding the potential repercussions of accessing loans from their 401(k) plans from advising on the tax pitfalls and the payback provisions as well as the long-term impact a loan can have on the size of their retirement savings plan. Companies would do well to devote as much time and energy to explaining to their employees the benefits of staying in their plans as they do in encouraging employees to join.
Ensure your company provides the best advice. Call a qualified Benefit Consultant TODAY. Visit http://www.BenefitConsultants.com for more information.
About The Author: BenefitConsultants.com is a site where you may find qualified benefit consultants to assist you in finding and pricing a plan for your company
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