What are the penalties for not paying back a loan out of my profit sharing plan after I leave the job?

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.

Getting Help

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.

Penalties for Not Paying Back a Loan From Profit Sharing Plan: Case Studies

Case Study 1: Amanda’s Employer-Managed Profit Sharing Plan

Amanda took out a loan from her employer’s profit sharing plan to cover some unexpected expenses. Unfortunately, she lost her job and was unable to repay the loan within the designated time frame. Since her employer manages the profit sharing plan independently, the penalty for non-payment is determined by their internal policy.

In this case, Amanda is subject to a penalty of 10% of the remaining loan balance. She is also required to pay income tax on the loan amount, as it is considered a source of income. Amanda realizes the importance of understanding the terms of the loan before taking it out and seeks legal advice to assess her options.

Case Study 2: Brian’s Financial Institution-Funded Profit Sharing Plan

Brian had a loan from his employer’s profit sharing plan, which was funded by a financial institution. Due to unforeseen circumstances, he left his job and couldn’t repay the loan within the specified time frame. Since the profit sharing plan is managed by a financial institution, the penalties are determined by their policies. Brian is informed that he will be charged a penalty of 6% of the remaining loan balance.

However, he is relieved to learn that he won’t be penalized for the accrued interest on the loan. Brian consults with a lawyer to fully understand the consequences of not repaying the loan and explores possible solutions.

Case Study 3: Sarah’s Combination of Employer-Managed and Financial Institution-Funded Profit Sharing Plans

Sarah had a unique situation where her employer’s profit sharing plan was partially managed by her employer and partially funded by a financial institution. She took out a loan from the plan to cover some medical expenses. Unfortunately, she left her job before being able to repay the loan.

In this case, Sarah faces a combination of penalties. The portion of the loan managed by her employer incurs a penalty of 12% of the remaining balance, while the portion funded by the financial institution incurs a penalty of 8%. Sarah realizes the complexity of her situation and seeks legal advice to understand the specific consequences and explore potential repayment options.