Will a default on a 401(k) loan affect a participant’s credit?

Defaulting on a plan loan does not affect your credit.  However, a defaulted loan balance does become taxable income to you.

Generally, a plan loan is considered in default at the end of the quarter following a calendar year quarter in which no loan payments were made on the loan.  When a loan is defaulted, you will receive a Form 1099-R which reports the taxable amount to the IRS.  This income will need to be included on your personal tax return for that tax year.  In addition, if you have not attained age 59 ½, a 10% early withdrawal penalty may apply to the defaulted loan amount.

Your plan may restrict you from a taking future loans out if you have defaulted on a previous loan.  Check your plan’s Summary Plan Description (SPD) or Loan Policy for more details.

This article was last updated on February 22, 2013

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