What are the penalties for not paying back a loan out of my profit sharing plan after I leave the job?
UPDATED: October 25, 2011
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Whenever you take out a loan against your employer’s profit sharing plan and aren’t able to repay the loan within the allotted time frame that the loan plan gives you, you can be penalized against the amount of the remaining balance on the loan. The amount that you pay because of the penalty depends both on the amount of your loan balance and the type of profit sharing plan your employer provides. If your employer manages its own profit sharing program, meaning that the program is not funded by a bank or other financial institution, you may be at the mercy of your employer’s profit sharing policy.
Financial Institution Profit Sharing Plans and Penalties
If the profit sharing plan is funded by a bank or investment institution that has an interest in your employer, the amount of the penalty you pay will be dependant on the terms that have been set by the institution that funds and manages the profit sharing program your employer subscribes to. Generally, you'll have a set time frame, such as your 60-day limit, under these rules.
If you do not repay the loan within the 60-day time frame of the termination of your employment, you can expect to pay upwards of 6 to 12 percent of the remaining balance on the loan, interest not included. This means you are not usually penalized for the amount of interest accrued on the loan. In any case, you may also be required to pay income tax on the loan as it will be considered a source of income.
The terms of your profit sharing loan are your responsibility to know at the time the loan is taken out per the Truth in Lending Act (TILA). If you have any concerns about the rules, you should consult with a lawyer prior to leaving your employer to learn what the consequences will be of leaving without paying back the loan.