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401(k) Loans

Published

Can my Betterment 401(k) plan offer participant loans?

Yes! If your plan is on the Pro or Flagship service level, it may offer participant loans. To check if loans are allowed, review your Summary Plan Description (SPD). If you’d like to add or remove loan options, a plan amendment is required.

What are the limits on participant loans?

If your Betterment 401(k) plan includes loans, they must follow IRS guidelines:

  • Participants can borrow up to 50% of their vested balance, with a maximum loan amount of $50,000.
  • Repayment typically must occur within five years, unless the loan is for a home purchase, which may allow for a longer term.
  • The minimum 401(k) loan amount at Betterment is $1,000.

Your plan may also set additional limits, such as a minimum loan amount or restrictions on the number of loans a participant can take. Betterment only allows one loan per participant for most scenarios. 

Do I have to allow loans in my Betterment 401(k) plan?

No, offering loans is optional. Some employers allow them to provide financial flexibility, while others choose to restrict loans to encourage long-term retirement savings. If you want to add or remove loans from your plan, a formal plan amendment is required. You can contact Betterment through the in-platform bot to initiate the process.

What are my responsibilities if my plan allows loans?

If your Betterment 401(k) plan includes a loan feature, you are responsible for:

  • Keeping loans compliant with IRS and Department of Labor (DOL) regulations.
  • Documenting loan policies in the SPD and communicating them to participants.
  • Managing loan repayments, typically through payroll deductions.
  • Handling defaults according to plan rules.

Find more information on your responsibilities here: It's Up to Plan Sponsors to Track Loans Hardship Distributions | Internal Revenue Service 

What happens if a participant defaults on a loan?

If a participant misses payments beyond the allowed grace period (often one quarter), the outstanding loan balance may be treated as a taxable distribution. This means:

  • The participant may owe income tax on the remaining balance.
  • If they’re under 59½, they may also face a 10% early withdrawal penalty.
  • Betterment will generate the IRS Form 1099-R for the participant.

To help participants stay on track, make sure they understand repayment terms before borrowing. These are provided on the site when they request the loan.

How can I update my plan’s loan provisions?

If you want to add or remove loans, your Plan Document must be amended. Since loan availability is only offered at the Pro or Flagship tier, you must be on one of these service levels to enable this feature. You can contact Betterment to begin the amendment process. Participants should be notified of any changes to loan availability. Betterment at Work will provide you with a Summary of Material Modifications and updated SPD.