Learn how taking a 401k loan is visible to your employer and understand the implications and conditions they might impose. Discover privacy rules around your 401k and employer’s role in setting loan terms.
By Brad Nakase, Attorney
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When you need an infusion of cash, borrowing from your retirement account (401k) can be a good way to get that money without taking on credit card debt or having to make a case to the bank. However, there are a few things to consider before taking a 401k loan. Many people wonder will my employer know if I take a 401k loan. Well, not only will your employer know you have taken a 401k loan, but they can also set terms and conditions for the 401k loan since some of that retirement account is their money. Let’s take a look at what you need to know about your employer and 401k loans.
A 401k account is a retirement account that both you and your employer contribute to. It is tax-advantaged as the money is added from your paycheck pre-tax, maximizing your contribution amounts. Because it is tax-advantaged, there are strict rules against withdrawing the money before retirement.
For example, if you withdraw a portion of your 401k before retirement age outside of the approved conditions (like a hardship withdrawal), then you are subject to a 10% early withdrawal penalty plus the payroll taxes that would’ve been charged. However, if you take a 401k loan, then you do not have to pay these taxes and penalties.
401k Savings Tips
A 401k loan is a great way to borrow money from your retirement accounts to solve current financial problems. The IRS gives you 5 years to repay the loan without any taxes or penalties being charged. Failure to repay the loan within that 5-year period means the IRS will consider it as an early withdrawal, and you will receive the penalty.
It is worth noting that while you are not charged interest on a 401k loan, there is an opportunity cost to 401k loans. That money would have otherwise been growing during the loan period, and therefore, the 401k loan will impact the money you have for retirement in the future.
Yes, your employer has an officer to monitor all 401k loans for your employer. This person is called the record keeper. Most employers have an external company manage their 401ks on their behalf, including providing an external record keeper.
The job of the record keeper is to document all contributions, withdrawals, and other changes to the 401k plans. These records are available to designated people in your company, so yes, your employer does know if you take a 401k loan.
The good news is that these records are confidential and, so your boss and colleagues will not have access to information about your 401k. The people designated to view these records in your company will likely be in HR or the finance department and will be governed by strict privacy laws. In a small company, it is more likely that someone you have contact with will know if you take a 401k loan, but they will have to stick to strict privacy rules and not disclose that information.
Your employer manages your 401k plan, and therefore, your employer sets conditions for your 401k, including 401k loan terms. For example, your employer can decide not to allow 401k loans at all. They can also set 401k loan conditions, including the reasons for a loan, maximum loan amounts, and repayment terms.
These employer 401k loan conditions cannot be more lenient than the IRS’s 5-year period. You will receive the early withdrawal and tax penalties if you do not repay your 401k loan during that time, regardless of what your employer says. However, your employer would be able to set a repayment schedule for the 401k loans.
Yes, your 401k loan will be on the records kept by the record keeper. This is private financial information, so access is restricted to designated employees who require the information as part of their role. Therefore, your colleagues and boss aren’t likely to be aware of your 401k loan. Your employer will also be able to set conditions for 401k loans, including not allowing 401k loans at all or imposing a stricter repayment schedule than the IRS’s 5-year repayment period.
Have a quick question? We answered nearly 2000 FAQs.
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