How Should I Proceed?

[swalsh411]

And you couldn't make payments on your own? You share some of the responsibility here.

 

[cbg]

With all due respect, if he'd tried to make payments on his own that would have REALLY screwed up the accounting.

 

[swalsh411]

With all due respect, if he'd tried to make payments on his own that would have REALLY screwed up the accounting.

Not really. You make one loan payment for each missed pay check deduction. Ultimately if you borrow money from your 401k, you are responsible for paying it back one way or another.

 

[cbg]

Yes, really. If the payments don't go through the payroll system, it can be a gargantuan task getting them applied properly after the fact.

I used to be the person who approved the loans and balanced the transactions. I know whereof I speak.

 

[LdiJ]

Yes, really. If the payments don't go through the payroll system, it can be a gargantuan task getting them applied properly after the fact.

I used to be the person who approved the loans and balanced the transactions. I know whereof I speak.

I absolutely agree. This is not a situation where the OP could have simply sent in payments to make things right.

 

[LdiJ]

What is the name of your state (only U.S. law)? Maryland

Hello. I took out a loan on my 401k plan back in March of 2012 for $40,000. The loan repayment agreement was to have $333.57 payroll deducted for 60 months. The loan repayments were to have begun no later than May 14, 2012. That did not happen. I was notified by the loan administrator that repayment had not begun and that the loan was going to go into default. I repeatedly notified my payroll department that the payroll deduction had not taken place and that the loan was about to go into default. They assured me that this would be taken care of and not to worry about it. The deduction from my pay did not happen until Sept. 2012. Then in March of 2013, the deductions stopped. I was contacted by my payroll department that they wanted to provide me some assistance with the tax and penalty obligation since they realize that this loan went into default because they were not timely in starting the deduction. They are offering an amount of $15,000+ for the estimated taxes and penalties. This all caught me by surprise. I contacted the 401k administrator who confirmed they had not received any payment towards this loan. When I questioned my employer, they asked me whether or not I had received a check for the monies that had been deducted. I informed them that I had not. When I asked where the money had been going, they could not tell me. I am supposed to have a conference call with them on Fri. 4/5 to discuss the plan for resolving this matter. My intent was not for this loan to go into default. My intent was for this money to be re-payed back into my retirement fund. When I stated this to them, they stated that they had gone through a transitional period within the payroll department and the person responsible for handling this had left the position. That still doesn't explain where my payroll deduction was going and why I wasn't notified until now that the loan was in default. Later I found out that apparently the loan went into default back in Aug 2012. What should I do? How should I proceed? How do I get this resolved?

I don't think that you CAN get it resolved in the manner that you would like. The fact that your employer is offering you 15k to cover the tax and penalty on the default is a clear indication of that. That is a huge sum of money for your employer to pay out for their mistake. As long as you also get back the money that you thought was being repaid to your 401k, you should probably accept their offer and then invest what would have been your repayments into some other investment vehicle...perhaps a Roth IRA if you are eligible for one.

 

[swalsh411]

I guess we will just agree to disagree on that then. I've done payroll or been the plan administrator for Mass Mutual, Vanguard, Merrill Lynch, and Fidelity plans. Employees can absolutely make payments on their own towards their if they choose to do so. I'm just not buying the "I take no responsibility for repaying my own loan" line.

 

[justalayman]

Yes, really. If the payments don't go through the payroll system, it can be a gargantuan task getting them applied properly after the fact.

I used to be the person who approved the loans and balanced the transactions. I know whereof I speak.

yes but there were no deductions for 4 months. Did the OP think the money fairy was going to magically make those payments for him?

The OP said this:

The loan repayments were to have begun no later than May 14, 2012. That did not happen. I was notified by the loan administrator that repayment had not begun and that the loan was going to go into default. I repeatedly notified my payroll department that the payroll deduction had not taken place and that the loan was about to go into default. They assured me that this would be taken care of and not to worry about it.

just where did he think those delinquent payments were going to come from? If the employer had not withheld the money, they were not going to get paid. What other option is there other than the OP making the delinquent payments?

They are offering an amount of $15,000+ for the estimated taxes and penalties.

cbg; that would be taxable income, right?

any idea what the taxes and penalty on the $40k would be? 10% penalty, right? around 5% state tax and around 28% for fed (plus SS tax of 6%, I think) That would be about 49% deduction? If so, that $15k of taxable income just isn't going to cover it.

 

[cbg]

Short of writing checks himself, which no matter what swalsh says I still maintain would have caused more problems than it solved, what are some of you expecting the poster to have done? He called, he questioned, when what he was told would happen didn't happen he called again. I'm not seeing any evidence that he was magically expecting a "money fairy" to make any payments for him; I'm seeing an employee who tried to resolve the problem with the resources he had at his command.

 

[tranquility]

Short of writing checks himself, which no matter what swalsh says I still maintain would have caused more problems than it solved, what are some of you expecting the poster to have done?

In what possible way? The loan is in default and, like LdiJ, I don't know if it can be fixed. (In that the money can be magically replaced to the 401K.) How can things be worse?

 

[Zigner]

Short of writing checks himself, which no matter what swalsh says I still maintain would have caused more problems than it solved, what are some of you expecting the poster to have done? He called, he questioned, when what he was told would happen didn't happen he called again. I'm not seeing any evidence that he was magically expecting a "money fairy" to make any payments for him; I'm seeing an employee who tried to resolve the problem with the resources he had at his command.

Had the employee made payments directly, then yes, it would have made a mess of the accounting for the employer. But, the loan would have been paid. At this point the loan has not been paid and the employer still has a mess. I guess I'm just not seeing what the down-side for the employee would have been.

 

[cbg]

Then I'll try again.

If the poster had attempted to make payments on his own right from the start, then there is every likelihood that they would not have been attributed properly. If they were not attributed properly, he would not get the credit for having paid. They would not be applied to the balance. The loan would still be in the same mess it is now, and he would have paid large amounts of money that he would not have credit for paying.

Please explain to me how that would be a better situation.

 

[Zigner]

Then I'll try again.

If the poster had attempted to make payments on his own right from the start, then there is every likelihood that they would not have been attributed properly. If they were not attributed properly, he would not get the credit for having paid. They would not be applied to the balance. The loan would still be in the same mess it is now, and he would have paid large amounts of money that he would not have credit for paying.

Please explain to me how that would be a better situation.

I'll concede that there may have been difficulties in making sure the payments were properly attributed if you'll concede that the OP didn't even TRY.

 

[tranquility]

Then I'll try again.

If the poster had attempted to make payments on his own right from the start, then there is every likelihood that they would not have been attributed properly. If they were not attributed properly, he would not get the credit for having paid. They would not be applied to the balance. The loan would still be in the same mess it is now, and he would have paid large amounts of money that he would not have credit for paying.

Please explain to me how that would be a better situation.

Because if the loan was paid, even if not attributed properly, but paid; the IRS would allow the money to be replaced. Here, because the loan was NOT paid, it cannot be replaced. The facts matter, not how the facts were interpreted at the time. The OP is in default. The IRS cannot allow good cause to change the law. But, it can allow proper changes to reporting.

 

[cbg]

Yes, I will concede that he didn't try to pay by writing checks on his own. I'm by no means convinced that he had any obligation to do so.