Q. Once a participant has defaulted on a plan loan, can they qualify for an additional loan? What if the defaulted loan has been deemed a distribution and taxes and penalties (if applicable) have been paid? I believe they can but only if the employer has obtained collateral or if the employer is willing to send in the loan repayments via payroll deductions. Thoughts?
A. You are exactly right. If there is an outstanding defaulted loan, no additional loan from any plan of the employer is permitted unless the employer permits payroll deducted repayments for the new loan, or outside collateral is held for the new loan. Many employers do not offer payroll deduction for loan repayments, and I am not aware of any employer or provider that will hold outside collateral (where would they put the Lexus?)!