If you have a 401(k) loan, you are required to follow your repayment schedule or your loan may be deemed distributed. However, there are 2 specific circumstances when you can request that your loan repayments be suspended without risking the taxation and penalties of a deemed distribution: when you are out on a bona fide leave of absence or qualified military service leave.
Bona fide leave of absence
If you are out on a leave of absence, either without pay or when your pay is less than the amount of the loan payments due, you may request to have your loan payments suspended for up to 12 months. During the suspension, you will continue to accrue interest on the unpaid loan amount.
Once you have returned from your leave of absence or the 12 months are up (even if you haven’t returned), whichever occurs first, you will be required to resume repayments.
While you are not required to make payments during your leave of absence, there is no extension to the repayment time frame. Instead, you must make up those missed payments by either making additional payments during the remaining repayment period or making a lump sum repayment sometime before the end of the repayment period. Any amount still due at the end of the repayment period will become a deemed distribution.
Qualified military leave
If you are out on qualified military leave, you may request that your loan repayments be suspended. Unlike a suspension during a bona fide leave of absence, there is no time limit on the suspension. You do not have to resume repayments until you have returned from qualified military leave.
During the suspension, you will continue to accrue interest on the unpaid loan amount. However, if the interest rate on your loan is greater than 6%, you can request that 6% apply during the time your loan is suspended. Please note, this is not automatic, and you must specifically request the reduction in interest rate. Once the suspension has ended, the original interest rate will resume.
When you return from qualified military leave, the amount of time you were out will be added to the end of your original repayment period, giving you more time to repay the loan.
While your payment amounts after returning from your leave cannot be less than they were prior to your leave, you will have several options for repayment:
Increase your payments to repay the loan by the end of the original repayment period
Re-amortize your payments over either the original or extended repayment period
Make a lump sum payment to make up for any missed payments prior to the end of the original or extended repayment period
You can find more information about the effect of military leave on your 401(k) plan here.
How to request a loan suspension with Guideline
If you believe you qualify for a loan suspension for a leave of absence or military leave, contact our Participant Support team. You will need to provide us with the following information for the requested suspension:
Reason for suspension
Start date of the leave
Estimated date of returning to work
Please note that when you return, you will also need to contact our Participant Support team to ensure repayments are restated timely.