Retirement plans may offer loans to participants, but a plan sponsor is not required to include loan provisions in its plan. Profit-sharing, money purchase, 401(k), 403(b) and 457(b) plans may offer loans. To determine if a plan offers loans, check with the plan sponsor or the Summary Plan Description.

IRAs and IRA-based plans (SEP, SIMPLE IRA and SARSEP plans) cannot offer participant loans. A loan from an IRA or IRA-based plan would result in a prohibited transaction.

To receive a plan loan, a participant must apply for the loan and the loan must meet certain requirements. The participant should receive information from the plan administrator describing the availability of and terms for obtaining a loan.

Maximum loan amount

The maximum amount a participant may borrow from his or her plan is 50% of his or her vested account balance or $50,000, whichever is less. An exception to this limit is if 50% of the vested account balance is less than $10,000: in such case, the participant may borrow up to $10,000. Plans are not required to include this exception.


Bill’s vested account balance is $80,000. Bill may take a loan up to $40,000, which is the lesser of 50% of his vested account balance and $50,000.

Sue has a vested account balance of $120,000. Sue may take a loan up to $50,000, which is the lesser of 50% of her vested account balance of $120,000 ($60,000) or $50,000.

Repayment periods

Generally, the employee must repay a plan loan within five years and must make payments at least quarterly. The law provides an exception to the 5-year requirement if the employee uses the loan to purchase a primary residence.

Loans to an employee that leaves the company

Plan sponsors may require an employee to repay the full outstanding balance of a loan if he or she terminates employment or if the plan is terminated. If the employee is unable to repay the loan, then the employer will treat it as a distribution and report it to the IRS on Form 1099-R. The employee can avoid the immediate income tax consequences by rolling over all or part of the loan’s outstanding balance to an IRA or eligible retirement plan by the due date (including extensions) for filing the Federal income tax return for the year in which the loan is treated as a distribution. This rollover is reported on Form 5498.

Loans that do not meet legal requirements

Loans that exceed the maximum amount or don't not follow the required repayment schedule are considered "deemed distributions.” If the loan repayments are not made at least quarterly, the remaining balance is treated as a distribution that is subject to income tax and may be subject to the 10% early distribution tax. If the employee continues to participate in the plan after the deemed distribution occurs, he or she is still required to make loan repayments. These amounts are treated as basis and will not be taxable when later distributed by the plan.

Loans to an employee in the armed forces 

If the employee is in the armed forces, the employer may suspend the loan repayments during the employee’s period of active duty and then extend the loan repayment period by this period.

If during a leave of absence from his or her employer, an employee’s salary is reduced to the point at which the salary is insufficient to repay the loan, the employer may suspend repayment up to a year. Unlike the exception for active members of the armed forces, the loan repayment period is not extended and the employee may be required to increase the scheduled payment amounts in order to pay off the loan in the originally scheduled period.

Spouse’s consent

Some qualified plans require a participant’s spouse’s written consent before giving a loan greater than $5,000. Other qualified plans may not require the participant’s spouse to sign for a loan, regardless of amount, if the plan:

  1. is a profit-sharing plan (e.g., a 401(k) plan);
  2. requires that the plan’s death benefit be paid in full to the surviving spouse (unless the spouse has consented to another beneficiary);
  3. does not offer a life annuity option in the plan; and
  4. does not contain a direct transfer from another plan that was required to provide a survivor annuity.

Should you borrow from your retirement plan?

Before you decide to take a loan from your retirement account, you should consult with a financial planner, who will help you decide if this is the best option or if you would be better off obtaining a loan from a financial institution or other sources.

When a participant requests a loan from your plan

The participant should receive information describing the availability of and terms for obtaining a loan. Some information that may be provided to a participant is as follows:

  • loans are/are not permitted;
  • minimum dollar amount required to obtain a loan;
  • maximum number of loans permitted by the plan
  • maximum dollar amount permitted;
  • term of repayment (number of years);
  • interest rate information;
  • security for the loan;
  • how repayment may be made (for instance, payroll deduction); and
  • spousal consent requirements

The participant should also receive an application and/or instructions for how to apply for the loan.

Correcting problems with plan loans

If participant loans under your plan do not meet the legal requirements, or if repayments have not been made according to the schedule set out in the loan document, you may be able to correct these problems using the Voluntary Correction Program. The program allows you to reamortize loans over the remaining loan period or report past-due loans as distributions in the year of the correction.

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