Expert: Allen - 3/27/2009

Question
I currently have a 401k loan with a stipulation you must pay it off in full if you leave your company. My company recently filed for bankruptcy protection and is now expected to be bought out by another company.  In this case they said that we would need to resign from one company to then accept the offer with the new company, even though we are being sold.  The company hasn't provided any policy updates on 401k loans?  What penalties would I face in this situation?  Do I have any legal rights since I didn't voluntarily leave the company and they decided to sell?


Answer
Unfortunately, most of what I have to say is bad news.

Check the terms of the loan. It probably says that the loan comes due if you terminate employment with the company and doesn't specify that the termination has to be initiated by you. If this is correct, then you have little recourse. If you don't repay the lawn, it's considered a distribution which is subject to income tax and an additional 10% excise tax if you're not at least 59 1/2 years old.

Possible good news. I would keep checking with the new company. There's a good chance that if you complain enough, they will allow you to transfer the loan along with the rest of your account to the new plan. They don't have to. However, it's worth trying.