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Second Loans for Those with Defaulted Loans

Q. My company sponsors mostly 403(b) plans which are considered church plans. We have many instances in which a client has an outstanding defaulted loan and requests a second loan. We allow employees to repay the defaulted loans first, then we allow them to take out a second loan which is again repaid via deduction from checking/savings account. Is this permitted?

A. The key is that the defaulted loan has been repaid. If the defaulted loan is no longer outstanding — and the plan permits — there would not be a payroll deduction requirement for repayment of a new loan!