With the recent economic downturn, many employers are seeing an increase in employees taking out 401(k) loans. An article on CFO.com reports jumps of 13 to 19 percent in the number of loans and hardship withdrawals. Despite their popularity however, these loans can be burdensome to both the employer and the employee.

On the employer side, keeping track of loans and managing repayments can be administratively difficult, especially if the payments are off schedule. For employees, they often don’t realize what happens when they take a loan and then leave their job, either voluntarily or involuntarily. The loan becomes due immediately. If it is not paid back, there can be serious tax consequences. In addition, many participants either stop contributing to their 401(k) in order to pay back the loan or they decrease their contribution amount. This reduces the amount they will have saved when it comes time to retire.

Still, many employers like to offer the loan feature with their 401(k) plans as an option for participants who might be reluctant to otherwise contribute to the plan. For these companies, CFO.com makes the following suggestions:

•    Limit participants to one loan at a time
•    Require a waiting period between the time a participant pays off one loan and takes out another one
•    In extreme cases, only allow loans for the same reasons as the IRS allows for hardship withdrawals (i.e. un-reimbursed medical expenses, the purchase of a primary residence, to avoid foreclosure or eviction, to pay postsecondary tuition or educational expenses, funeral expenses, or to repair a home due to damages from a natural disaster or theft).

While 401(k) loans do have their place in emergency situations, participants should be cautioned to use them as a last resort. NADART has several calculators to help determine what effect a withdrawal would have on participant’s account. In addition, NADART offers a wide range of tools and plan features designed to help you and your employees save more for the future. If you are interested in learning more about NADART’s retirement plan services, please contact (800) 462-3278, ext. 7161, or e-mail nadart401k@nada.org.