When an employee takes out a 401(k) loan, the payments will be made via payroll deductions. If you’re the plan sponsor of a self-service plan, then you’ll need to make an adjustment within your payroll provider as well as the payroll reports you share with Guideline, so deductions are pulled from the employee’s pay accordingly.
You should receive an email notification that outlines the payment details you’ll need to enter, including the pay date the first repayment is due and the payment amount that should be deducted. Loan repayments should be set up as continuous post-tax deductions. If you do not include the loan amount in your payroll provider and Guideline report, the employee’s payments will be recorded as missed and their loan could eventually default.
Here’s how to start or stop these deductions to ensure your employee’s payments are delivered according to their loan terms.
How to set up loan payments for an employee
To initiate loan payments for your employee, you’ll want to include the deduction in your payroll provider as continuous post-tax deductions.
Then, the same template you use to upload your typical payroll reports to Guideline will also be used to input loan payment amounts for employees with a loan. To enter the loan repayment information:
Access the “Payroll report template” used to upload payroll information for contribution processing.
Within the spreadsheet, find the last column labeled “Loan Repayment.”
Locate the employee’s name within the list and enter the repayment amount specified in the “Set up loan payments” email you received from Guideline.
Upload your payroll report as you typically would following the instructions here.
The loan repayment amount will then be deducted from the employee’s paychecks.
What to do if you’re late in setting up an employee’s loan payments
If you process payroll after the repayment start date of the loan without deducting the loan payment due, then simply add the usual payment amount to your next payroll report. Then, let your employee know a deduction was missed, as they will need to manually make a payment directly through their Guideline dashboard.
Employees will generally see a payment marked as missed in their dashboard about a week after the pay date. Self payments made before a payment is marked missed will be counted as extra payments and not make up payments.
It’s imperative to set up your employee’s loan payments as soon as possible, as missing too many could lead to a defaulted loan. Loans default when any payment is more than 90 days past due.
When a 401(k) loan defaults, the remaining loan balance will be deemed a distribution by the IRS and considered a taxable event for the employee. Deemed distributed loans are not eligible for rollover. Additionally, if the employee is under age 59 ½ years of age, then a 10% early withdrawal penalty could also apply.
How to stop loan payments for employees
If you receive a notification to stop an employee’s loan repayments, then it is either because their loan has been paid in full or their loan has defaulted.
To stop loan payments, simply remove the deduction amount for that employee in your payroll provider. Then, delete the loan amount in the “Loan Repayment” column of your “Payroll report template” before uploading it to Guideline.