QUESTION: We have several 401(k) plan participants who have been called to active military service and would like to suspend their plan loan repayments during their military leave. Do the rules for suspending loan repayments during a regular leave of absence apply to military leave?
ANSWER: The rules for suspending loan repayments during a military leave of absence are broader and more flexible than for a regular leave of absence. For a regular leave, the maximum payment suspension period is one year, and the entire loan must be repaid within the maximum permissible term (five years, for loans other than those for a principal residence). For a military leave, however, your 401(k) plan may permit suspension of loan repayments for the entire period of the military leave even if that period exceeds one year, and the term of the loan may be extended to the maximum permissible term of the loan plus the period of military leave. But it is important to remember that interest on the outstanding loan would continue to accrue during the military leave suspension period.
- Example. Julie took out a three-year loan on February 1, 2025. She was called to active military service for two years, beginning on October 11, 2025. Your plan can suspend her loan repayments during her entire two-year military leave. If she had not been on military leave, her last loan repayment would have been due on January 31, 2028. But, because she will be on military leave, the term of the loan may be extended to its maximum permissible term (five years, if the loan is not for a principal residence) plus her period of military leave (two years). With this extension (and assuming her military leave is in fact two years), her last loan repayment would be due on January 31, 2032.
When a participant returns from military service, loan repayments must resume and must be made in substantially level payments. Keep in mind that, because interest continues to accrue during military leave, the participant’s post-leave loan balance will be greater than the pre-leave balance. The plan may permit the participant either to resume paying the same dollar amount as before with a “balloon” payment of the balance due at the end of the loan term, or to reamortize the balance due over the remaining loan term with payment amounts not less than those required under the original loan.
Also note that the Servicemembers Civil Relief Act (SCRA) provides that the interest rate on loans (including 401(k) plan loans) during a period of military service cannot be more than 6% per year. Criminal penalties may be imposed for knowing violations of the interest-rate limit. The SCRA requires servicemembers to give the plan notice and a copy of their service orders to obtain the capped interest rate. However, due to the possibility of criminal penalties, it may be advisable to impose the 6% interest limit on any outstanding plan loan of a servicemember on military leave (even if the individual does not provide a copy of the service orders).
For more information, see EBIA’s 401(k) Plans manual at Sections XVI.M (“Special Rules for Participants on Military Leave”) and XXXIX (“Special Issues: USERRA and Other Military-Service Related Rules”).
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