Not repaying a plan loan before leaving a job has tax consequences. A worker is potentially taxed when the plan balance is used to repay the loan. For most plan loans, the amount borrowed is secured by the participant’s account. Putting equivalent funds back in the plan within 60 days will avoid the tax.
In essence, the repayment of the loan with outside funds is akin to doing a rollover. IRS can grant extra time to repay the plan, as a private letter ruling shows.
In this case, the bank administering the retirement plan failed to tell the participant that he had 60 days after the loan offset to put that amount back into the plan. Since he didn’t know his options, IRS said he could do a late rollover of the funds.