Have rules for 401(k) loans changed?

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Q. Has there been a change in law about what happens to 401(k) loans that are not fully paid when you leave your job? You used to have 60 days to pay it back or it would be a taxable distribution.
— Curious

A. Yes, there has been a change.

It all depends on the exact timing of when you leave your job.

You should check with your plan administrator, but it looks like the date you separate from service would control which tax year the loan offset occurs in, thus determining the due date when the funds need to be repaid, said Howard Hook, a certified financial planner and certified public accountant with EKS Associates in Princeton.

“If you separate from service on Dec. 31, 2019, then you would have until Oct. 15, 2020 to repay the loan,” Hook said. “That is because the new law extends the period of time to repay the loan until the due date of the return, including extensions.”

Separating from service on Jan. 2, 2020 would give you until Oct. 15, 2021 to repay the loan, he said.

“This three-day difference can give you twelve additional months to repay the loan so it is critical you confirm with your employer the termination date they are using for you,” Hook said. “You also should make sure that your employer will code the loan offset as such and not as a deemed distribution.”

A deemed distribution is a taxable event and occurs when the loan fails to meet tax rules, Hook said.

Examples that can cause a deemed distribution include failure to make a loan repayment, a loan term exceeding the term allowed by law and borrowing more than the amount allowed under the law, Hook said. Plus, he said, deemed distributions cannot be rolled over.

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