Author: Roberta Granadier

Common But Costly Mistakes in 401(k) Plan Loans

Many 401(k) plans allow participants to borrow amounts from their vested 401(k) plan accounts and repay such amounts, typically through payroll deductions, back to their own accounts. Plan loans must comply with IRS rules which govern: the amount of the loan (lesser of $50,000 or 50% of the vested account balance), the loan term (5 years, unless used to purchase the participant’s principal residence), loan repayments (must be substantially level), and interest rates (must be reasonable). Background on Participant Loans Participant loans are often pre-approved (other than home loans which require extra administration and documentation). Participants can apply on-line or call the 401(k) plan service provider to request a loan. The approval process is short and participants often receive loan proceeds within 7 – 10 days following loan initiation. This means that loan repayments must be set up quickly in the employer’s payroll system. Loan Payments Not Beginning on a Timely Basis One common mistake is that loan repayments do not begin on a timely basis. This delay is often caused by a lack of communication and coordination between the 401(k) plan provider and the employer’s human resources and payroll departments. Repayment delays are also caused by administrative errors. Loan repayments should be deducted from a participant’s wages as soon as possible after loan proceeds are received, but the participant’s payroll deduction sometimes starts weeks or even months late....

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Change of Control Agreements Can Trigger Parachute Payment Penalties

Employers often want to provide extra benefits or security to key employees amidst the uncertainty caused by a change of control.  These arrangements are often referred to as “golden parachute payments” because they help key employees land safely in a sale, merger, change in management or other corporate transaction.  Examples of change of control agreements include accelerated vesting and accelerated payments of nonqualified deferred compensation plan benefits or stock options.  Some employers also offer stay bonuses to encourage employees to remain employed pending sale negotiations, or sale bonuses to incentivize and reward key employees for a sale of the company.  Without careful planning, these arrangements can trigger costly tax penalties for both the employer and the employee.            Benefits Constituting Parachute Payments  Extra benefits payable to key employees will constitute parachute payments if such payments: (a) are made to a “disqualified individual;” (b) are compensation for past services; (c) are contingent on a change of control; and (d) equal or exceed three times an individual’s base amount.  Base amount means the individual’s average annual compensation for the five tax years ending before the change of control date.  If the individual was not employed by the company for five years, then the individual’s base amount is the average compensation over the number of years he was employed with certain rules for annualizing compensation for a partial year.  Excess Parachute Payments  Once...

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The HR Blog is published by Dickinson Wright PLLC to inform the public of important developments within the firm and practice areas. The content is informational only and does not constitute legal or professional advice. We encourage you to consult a Dickinson Wright attorney if you have specific questions or concerns relating to any of the topics covered in this blog.

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