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Bschade3

401K Loan Dispute

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I currently have an outstanding primary residence loan taken on my 401K.  Prior to leaving my employer, I called Prudential to ask if it was possible for me to continue payments on this loan if I were to leave the company as this was a big part of my decision-making process.  Being that the loan is still $19K outstanding, the penalties for me going int default (early withdrawal 10% plus the addition of income) would outweigh the benefits of the new position I wanted to take, I needed to know if this was possible.  The agent told me "yes."  They would send me a coupon book upon leaving so I could continue to pay on the loan for the life of the loan.  After this information, it was made clear to me that I could make my move without any loan penalties.  I thanked her and actually indicated to her that she made that decision for me and thank you!

 

Fast forward to me in my new position with my new employee two three weeks later.

 

I get a call from Prudential that the last agent I spoke to was incorrect and that I would need to pay the loan off prior to years end if I wanted to avoid the penalties.  I explained that I made my decision partly/mainly based on the information the previous agent had told me and that this should not be my burden now being that I was told something completely wrong.  

 

They went back and reviewed the taped phone call and said that I was correct in that the agent made a mistake, but she assumed I was staying with the company, but going over seas and that the 401K plan had this provision set for such a situation.  Wait....what????  I never even came close to giving that indication to the initial agent. Now....the new agent tells me that there is nothing they can do.  I continued to state that this, in no way, was my fault and Prudential now needed to step up and allow me to make payments to the loan.  They said there is nothing they can do and that I need now pay the penalties and the extra taxes.

 

I am at a loss.  What are my options here?  They can't just tell you wrong information, allow you to base your decision on that information, then go back and say "oops.....sorry", can they?  Do I have any legal recourse?

 

Any help would be greatly appreciated.

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It seems the issue is.a.factual question.  The factual question is , "Did you tell the agent you were leaving the.company immediately after the making of the loan or did you indicate you were merely moving to another location?"   Do you have access to the tape recording?

 

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21 minutes ago, Bschade3 said:

They can't just tell you wrong information, allow you to base your decision on that information, then go back and say "oops.....sorry", can they?

 

Obviously, they can because they did. Sorry, but you made the mistake of relying on what you were told on the phone without verifying it by reading your 401(k) plan and loan documents.

 

The loan repayment requirement is based on the IRS 401(k) rules.

 

23 minutes ago, Bschade3 said:

Do I have any legal recourse?

 

I doubt it.

 

 

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I just can't believe that incompetence gets the upper hand again.  I can't even get a burger made without it being wrong.  The younger generation just doesn't care and they go wrecklessly around providing wrong information....but that is OK I guess.

 

RetiredinVA - Yes....I told them that I was leaving immediately.  I asked Prudential for the taped phone call but they are unwilling to provide it as they said they can't do that.  Not sure why as it is my voice on it.

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Adjusterjack - I understand the loan repayment rules are made by the IRS....but if I a able to pay the loan monthly, which is an option that some companies allow so I know this is possible, all would be good.  I am not looking for a freebie here, just fairness.

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51 minutes ago, Bschade3 said:

I am at a loss.  What are my options here?  They can't just tell you wrong information, allow you to base your decision on that information, then go back and say "oops.....sorry", can they?  Do I have any legal recourse?

 

Any help would be greatly appreciated.

 

Under the federal tax law, the employer may require in the plan documents that outstanding loans be repaid when the employee leaves the company or the plan is terminated. So whether you must repay the loan now depends on what the plan documents and your loan documents say. The plan trustee must follow the rules provided for in the plan. So read the plan and see what it says. If it does require that you repay it when you leave then the trustee must apply that rule and you are stuck with that. However, in the event that you cannot repay it, you can avoid the immediate tax consequences by rolling over the outstanding balance into an IRA or other eligible plan by the due date to file your return for the year, including extensions. So if you get an extension until October 2020 you would have that long to roll it over and avoid the income inclusion and early withdrawal tax. See the IRS page on Retirement Loan Topics.  If you need to get some other loan to cover the roll over that might still be a better outcome for you than the tax hit. 

 

You could see a local attorney to find out if under your state's tort law you might have a claim here for negligence against Prudential. The problem that I see, though, is that if the answer is clearly in the plan documents it is likely that you would be expected to have looked at those and you'd have had the right answer. Since the plan documents should have been readily available to you, relying on the customer service people may not have been reasonable in the sense meant by the law. But you can discuss that with the attorney to see how that might impact things. Many civil litigation attorneys give free initial consultations, so you'd only lose a little time.

 

In the end, though, if you can do the rollover, that's probably your best solution to this. 

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Thank you so much Tax_Counsel.  You have been a great help.  So....If I roll over the  monies into the IRA that you speak of, the the 2017 tax laws take effect and I would not need to pay the penalties until 2021 (for 2020 tax  season) correct?

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9 hours ago, Bschade3 said:

Thank you so much Tax_Counsel.  You have been a great help.  So....If I roll over the  monies into the IRA that you speak of, the the 2017 tax laws take effect and I would not need to pay the penalties until 2021 (for 2020 tax  season) correct?

 

You left the job this year (2019) and triggered the repayment requirement. If you don't timely repay the loan, the loan amount still owed is deemed a distribution of that amount to you for 2019 unless you roll over the loan amount into an IRA or other qualified retirement plan by the due date (including extensions) for filing your 2019 return. So if you get the extension to file to October 15, 2020 you'd have until then to do the roll over. If you fail to make the rollover then the loan ends up as a distribution for 2019, with the result that you have income in that amount for 2019 and would also be subject to the early withdrawal tax if you were not at least age 59½ on the date of the deemed distribution.

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1 hour ago, Tax_Counsel said:

 

You left the job this year (2019) and triggered the repayment requirement. If you don't timely repay the loan, the loan amount still owed is deemed a distribution of that amount to you for 2019 unless you roll over the loan amount into an IRA or other qualified retirement plan by the due date (including extensions) for filing your 2019 return. So if you get the extension to file to October 15, 2020 you'd have until then to do the roll over. If you fail to make the rollover then the loan ends up as a distribution for 2019, with the result that you have income in that amount for 2019 and would also be subject to the early withdrawal tax if you were not at least age 59½ on the date of the deemed distribution.

I guess where I am getting confused is that if I have until 2020 to roll the 401K plus loan over, but fail to do so, that failure would occur in 2020 and then be reported to the IRS in 2020, correct?  If I file my taxes for 2019 on April 15th, 2020,  how is the iRS notified that I defaulted on the loan at the same time I am filing my 2019 taxes?  I was under the assumption (which sounds like its an incorrect assumption) that this would be reported at the time of default, which would be either April 15th, 2020 or October 15th, 2020 if extension is filed.  Is it that the IRS would expect me to file an amendment to my 2019 return if I default on April 15th 2020?

 

Sorry for my ignorance, but I am so confused.  Thank you so much for taking your time out to explain this to me.  It is so much appreciated.

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I'd see the advice of a local attorney/tax advisor regarding taxability and the ability to rollover.  "unless you roll over the loan amount into an IRA" ...I am not sure if TC is suggesting that you can roll the loan balance and continue to pay the IRA (which I have never heard of) or something else.  I'd love clarification on that too....

 

  This is a complicated situation, but I have to agree that the 401(k) Plan MUST follow the plan document and it is rare that an employer allows an ex-employee to continue making 401(k) loan payments since they normally flow through payroll deductions.  To do so it must be in the plan documents and/or loan procedures. It's not up to the recordkeeper to decide.  I suspect your original loan paperwork stated these consequences for taking your loan and I would look back on those.  I ALWAYS warn my employees about the down side of taking a loan and that it will be taxable after they terminate..... 

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10 hours ago, Bschade3 said:

I guess where I am getting confused is that if I have until 2020 to roll the 401K plus loan over, but fail to do so, that failure would occur in 2020 and then be reported to the IRS in 2020, correct?  If I file my taxes for 2019 on April 15th, 2020,  how is the iRS notified that I defaulted on the loan at the same time I am filing my 2019 taxes?  I was under the assumption (which sounds like its an incorrect assumption) that this would be reported at the time of default, which would be either April 15th, 2020 or October 15th, 2020 if extension is filed.  Is it that the IRS would expect me to file an amendment to my 2019 return if I default on April 15th 2020?

 

Sorry for my ignorance, but I am so confused.  Thank you so much for taking your time out to explain this to me.  It is so much appreciated.

 

Here's how it will go. The plan administrator at your old job will send a Form 1099-R to the IRS and to you in January or February next year reporting the unpaid loan amount as a distribution for 2019. But how you report that on your 2019 return depends on whether you get the money and do the roll over before the due date of the 2019 return. The roll over is done simply by coming up with the cash in the amount of the deemed distribution and putting it into an IRA or qualified plan by that date. So if you plan to do that, you'd wait to file your 2019 return until you did the roll over (but ensuring the return gets filed on time) and report on the return that the deemed distribution that was reported on the Form 1099-R was timely rolled over. That would then avoid having to include it in your income and avoid the early withdrawal tax. If you can only come up with part of the funds to do the roll over you can do the partial roll over and at least avoid including that part in your income. The part you don't roll over would still be included in income and subject to the early withdrawal tax.

 

21 minutes ago, hr for me said:

I am not sure if TC is suggesting that you can roll the loan balance and continue to pay the IRA (which I have never heard of) or something else.  I'd love clarification on that too....

 

No, I am not. Bschade3 would have to come up with the cash to make the roll over contribution by the return due date. That may mean taking out a personal loan or whatever to do it.

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Gotcha TC --- just wanted to clear that up..... but yes, OP would need to come up with some or all of the loan balance to make that work.  And in the end if he could come up with some/all of the money, he could also just pay the loan off through the current 401k plan as long as he does so prior to it being a deemed distribution.  But your way might give him extra time to do so.

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3 hours ago, hr for me said:

Gotcha TC --- just wanted to clear that up..... but yes, OP would need to come up with some or all of the loan balance to make that work.  And in the end if he could come up with some/all of the money, he could also just pay the loan off through the current 401k plan as long as he does so prior to it being a deemed distribution.  But your way might give him extra time to do so.

 

Typically when the plan requires the loan be paid off at separation from the company the window for doing that is pretty short. So if the OP can't do that, the roll over may give him/her the extra time needed to come up with the cash.

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