A Publication of WTVP

Both the advantages and drawbacks should be carefully considered.

Whether or not to offer participant loans in a retirement plan is a question every plan sponsor must consider. Offering loans may encourage more employees to participate in the plan by giving them the assurance that they will be able to access their money if they need it. On the other hand, participants who withdraw funds for loans may hinder their ability to save enough for retirement.

Determine what you want to achieve with your plan
As a plan sponsor, you should begin by evaluating your motives for offering a retirement plan. If your goal is to provide an avenue for your employees to save for retirement, 401(k) loans may work against your objective. Because employees have access to their money, they can take away from their retirement savings for current needs. On the other hand, if your goal is to have as many employees participate in your plan as possible, giving them the assurance that they will be able to access their money can help attract employees that otherwise may not have participated.

Borrowing from the retirement plan
Consider whether employees are likely to understand the loan process and the tax consequences of borrowing against their retirement account. Loans can have severe financial consequences if the worker terminates employment while a balance is still outstanding. In most instances, participants will have limited time to repay the entire outstanding balance, or risk defaulting on the loan. In the case of a default, the loan is deemed to be a distribution, and the participant will receive a Form 1099 for the outstanding loan amount. This results in taxable income to the participant.

Staffing to support a loan program
Providing a loan program may result in “hidden costs” in the form of increased administrative burden for your human resources and payroll departments, as well as increased fees from the plan's service providers. While some of these costs may be charged directly to the participants who are taking loans, others may be bundled in the recordkeeping fees charged to the plan sponsor.

Advantages to offering participant loans

Drawbacks to offering participant loans

Best practices when offering a participant loan program

Alternatives to loans
If giving employees access to their money while employed is a priority for your organization, you can choose to implement a hardship distribution program. A hardship distribution allows participants to withdraw money while still employed, subject to the following IRS guidelines:

Hardship distributions must be treated with care, as the employer must obtain evidence of the hardship from the employee and review the documentation to ensure it meets the guidelines set forth by the IRS. Documentation should be maintained for compliance and audit purposes.

Ultimately, loans and hardship distributions are not required features of a plan; it is up to your organization to decide whether you want to offer these features. iBi

Kyle Rose is the local contact for CliftonLarsonAllen; contact him at [email protected] or (309) 495-8716. This article was originally published on The information contained herein is general in nature and is not intended, and should not be construed, as legal, accounting, investment, or tax advice or opinion provided by CliftonLarsonAllen LLP (CliftonLarsonAllen). For more information, visit