Retirement Plan Services: Loans and Distributions

Retirement Plan Services: Loans and Distributions

By: Julie Reinhardt, Retirement Associate

Employees can have access to funds while they are still employed if your plan document includes those provisions. The two most common options are participant loans and hardship distributions.
Participant Loans
Participants are limited to one-half of their vested account balance up to a maximum of $50,000. The $50,000 limit also has a look-back provision causing the plan to look backward to the previous twelve months. If the participant had a previous loan balance in the past 12 months, the participant’s loan availability will be reduced by the highest outstanding loan balance in the past twelve months. Participants are required to make loan repayments via payroll deduction. Please contact your software provider if you need assistance setting-up loan repayments. Participants will pay back the loan principal plus an interest rate, stated in the plan’s loan policy. Most loans must be repaid during a five-year period. Loans for the purchase of a primary residence might be able to be extended beyond five years. If an active participant stops paying on the loan, the loan will remain on the system, but the balance can be deemed taxable to them at the time the payments stopped. They may be prohibited from taking a new loan. If a terminated participant does not repay the loan, the loan balance becomes taxable to them and the loan balance will be removed from the record-keeping system.
Hardship Distributions
Some plans also allow for hardship distributions. Participants can apply for a hardship distribution by contacting ML&R Wealth Management. They must satisfy at least one of the hardship reasons dictated in the plan document. The participant bears the burden of providing and retaining proof of those hardship situations. Proof could be in the form of an invoice or bill for the amount they need. The plan document will also indicate what source(s) of funds (employee deferrals, employer contributions, etc.) are available.
Other In-Service Distributions
If a participant has rolled over funds into your plan, most plan documents allow for them to take a distribution of those rollover funds at any time even if no hardship exists. The plan document may also allow for distributions at age 59 ½, while a participant is still employed.

ML&R Wealth Management serves both as an investment advisory fiduciary in the 3(21) or 3(38) capacity and as an administrative fiduciary in the 3(16) capacity for our clients. We are here to here to help alleviate many of your administrative burdens. Please contact us with any questions.

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