10% penalty waived on outstanding loan employee is laid off

employee of a company is laid off and is 55 years old. they are going to do a rollover with their 401(k) but they have an outstanding loan balance. client is questioning since he is 55 years old would the 10% penlaty be waived when outstanding loan balance is reported as income.



This can be very tough to determine because there are some complex rules regarding the timing of deemed distributions. If the deemed distribution is incurred prior to separation, then the age 55 exception would not apply. There are various “curing periods” in these plans that allow for loans to be brought current and these also have a bearing.

Of course, if the loan can be brought current in time, it takes the penalty off the table if the actual distribution is taken after separation in the year employee turns 55 or later.



Add new comment

Log in or register to post comments