What happens to your 401(k) loan if your company temporarily closes shop?

With Non-Essential businesses across the country being encouraged to shut their doors, thousands of employees are going through a furlough period… They haven’t been fired, but they aren’t working, either.

If an employee has an outstanding loan against their 401(k) account, failure to make payments can cause that loan to default, triggering a tax bill at the end of the year. Thankfully, the IRS has a 401(k) provision that can help:

According to the IRS, (Reg. Section 1.72(p)-1, Q&A-9(a)) “A plan may suspend loan repayments during a leave of absence of up to one year. However, upon return, the participant must make up the missed payments either by increasing the amount of each monthly payment or by paying a lump sum at the end, so that the term of the loan does not exceed the original 5-year term.”

If you’re in this situation, it’s important for you or your employer to contact your 401(k) provider and let them know you’re on a leave of absence and you’d like to defer 401(k) loan payments until you resume working.