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Asked 8/16/2011

Applying 401k loan payments

Doing an audit of 401k. Employee borrowed $3600 from his 401k. For repayment it was deducted from his paycheck each pay period. How is this replayment applied to the 401 so you can see the differenced between a NORMAL 401 contribution and a repayment of loan?

 
 
 
 
 
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Answer 1/1 - Submitted 8/16/2011

If only there were one answer for this. The fact is that different record keepers may show this differently but here is the most common way to do it.

When a loan is taken the funds are sold and a loan balance is created. This loan balance may or may not show up under the sources (pretax, match, etc.) that it was deducted from. As the loan is paid back, many record keeping systems will show this in a "loan payment" column but some will simply show it as a contribution.

Once the payments are received they are invested according to the investment elections and should go back to the sources that they came from. That means if you took a loan 50% from pretax and 50% from match it should go back 50/50 as well. Once it is invested and put back into those sources you will not normally be able to tell from a statement that it was ever part of a loan. The outstanding loan balance would be reduced by the principal amount with each payment.

If you are doing an audit to find out how much this person paid to the loan there are 2 ways to do it. One is to audit the payroll system for loan payments since they should be a deduction type. The other is to audit the retirement plan system for loan repayments but this may not be obvious from a statement and may require you to query the transactions or ask the record keeper to do that.

Good luck!

 
 
 
 
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