Personal Finance & Money Asked by user110147 on July 26, 2021
My company (a large health co) merged with a larger Pharm Co. In this process, we basically got all the Pharm Co benefits. When with the health co, I took out a 401k loan which had the provisions that if I was laid off/or left the company I could continue repaying the loan as long I made the bi-monthly payments.
As part of the conversion, we got a new 401k provider. I just checked with the provider and they confirmed, that no, under the new plan, it doesn’t matter what I was originally told, now if I get laid off or leave the company, I have to repay the loan immediately or it will be taken out of my account and I will be hit will all the punitive taxes.
Is this legal? I wouldn’t have taken it out if this was the case.
The bottom line is you were given incorrect information in both cases. There is federal law/tax code that governs this situation.
It used to be that one had to replay a 401K soon after leaving an employer (within 60 days), and for that reason it was widely discouraged by most financial advisers to take such a loan.
However, under the Trump tax plan that has changed in what most see as extremely consumer friendly. You now have until the due date until the next tax filing. In your case, if you use standard tax filing, if you left your job today (23 June 2021) you would have until 15 April 2022 to pay back the loan. Still, not an super long time but much longer than 60 days.
Not paying it back in time hurts you in two ways: The first is taxes, you will owe income tax on the money borrowed, and will have to pay a 10% penalty. Second, is that it is hard to get money into retirement accounts. This may be due to income limitations, or limitations imposed by the IRS. It takes time to make up that money and you lose the compounding forever.
So the first company was incorrect in suggesting that you had forever to pay it back. The second company is incorrect in that you have to pay it back right away.
Generally speaking borrowing from a 401K is a bad idea. Pay it back as soon as you can.
Answered by Pete B. on July 26, 2021
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