MMC Benefits Handbook
Loan Taxes
  • When you take a loan from the Plan, it is not taxed. However, if your loan goes into default and you do not make up the payments then the Internal Revenue Service requires that a default be declared no later than the last business day of the calendar quarter following the calendar quarter in which your first missed payment was due. If you do not repay your loan(s), the outstanding loan balance, plus accrued interest, may be treated as a deemed distribution from your account reducing your vested account balance by the outstanding loan amount with the outstanding loan amount (plus accrued interest) being subject to income tax including an additional 10% Federal early withdrawal tax if you are under age 59-1/2 unless an Internal Revenue Service exception applies to you.
  • In addition, following a deemed distribution, the outstanding loan balance will continue to be taken into account when determining the number of loans you have outstanding and the amount available for a new loan. This can restrict your ability to take another loan in the future.
Loan Repayment on an After-tax Basis
You can only repay your loan on a traditional after-tax basis. The amount of the loan and interest that you pay on your loan (and that is credited to your account) may not be tax-deductible and will be taxable to you when it is later distributed from the Plan, except to the extent the distribution includes your after-tax contributions. (You may want to consult with a tax professional.)