The Solo 401k Participant Loan Grace Period Explained

While the IRS provides a grace period that separately applies to each scheduled solo 401k participant loan payment, if the grace period is missed the remaining loan balance is considered in default and will result in a taxable distribution.

The solo 401k participant loan grace period allows for the missed loan payment to be made by the end of the quarter following the quarter of the missed payment.

For example, if the solo 401k participant loan is being paid back on a monthly basis and the monthly scheduled payment was due on July 15  but the payment was missed, the missed payment would need to be made by December 31 (the end of the grace period). (Reg. Section 1.72(p)-1, Q&A-10(a))

 

 

A loan that is in default is generally treated as a taxable distribution from the plan of the entire outstanding balance of the loan (a “deemed distribution”).

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