Retirement Plan Services: Participant Access of 401(k) Funds During Employment

Retirement Plan Services: Participant Access of 401(k) Funds During Employment

This article contains some important reminders about participants accessing their funds while they are still employed.  Please make sure to contact us with any questions you may have as you administer your plan.

Employees can have access to funds while they are still employed by taking a loan from their account, if your plan has adopted a loan provision.

The maximum loan amount participants can receive is 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 back to the previous twelve months. If the participant had a previous loan balance in the past twelve months, the participant’s loan availability will be reduced by the highest outstanding loan balance during those 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.  Some loans, for the purchase of a primary residence, can 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 end of the quarter following the quarter in which  the payments stopped.  They may also 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.

Under the CARES Act, plan sponsors may elect to allow loans up to a higher dollar amount or percentage of the participant account balance. The loan must be taken by September 23, 2020. The plan may also allow for participants to suspend their loan payments.  Only plans that adopt the provisions can use them.  In addition, only participants who are qualifying individuals under the CARES Act may use those options.

Employees may also access their funds in a hardship situation if the plan document allows for this type of distribution.

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.

There may be other circumstances provided in your plan document which may allow for participants to access their funds.

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.

Until December 31, 2020, plan sponsors may elect to allow distributions for participants who are qualifying individuals under the CARES Act.  Only plans that adopt these special CARES Act distributions can utilize them.

If you are unsure of what provisions your plan document allows, ML&R Wealth Management is here to help you answer those questions.  We are also here to consult with your participants about these options, the tax implications of these options, and relieve you of that burden.   ML&R Wealth Management is a committed partner with you as a co-fiduciary to your retirement plan. 

About Author

Related posts