Loans are optional in 403(b) plans, but if the sponsor permits them, the maximum an employee can borrow is the lesser of $50,000 or 50 percent of the vested account balance, reports the IRS. The participant must make at least quarterly payments and repay the entire loan within five years.
If the vested account balance is under $10,000, the sponsor can allow employees to borrow up to $10,000, according to the IRS. Plan participants can also take more than five years to repay loans if they are buying a primary residence. The terms of loans from some 403(b) plans require the signature of a spouse for loans over $5,000. When participants do not pay back loans on time, plan sponsors may treat them as distributions, and the borrower must pay both income tax and a 10 percent early distribution tax on the amount of the loan.
When a participant leaves the company, the sponsor can request immediate repayment of the full value of the loan or report the loan as a distribution subject to full taxes and penalties, states the IRS. If an employee goes on a leave of absence, sponsors can suspend loan repayments for up to a year, but the employee must make up the gap with larger payments to finish paying back the loan within the five year limit. When an employee goes on active duty in the military, the sponsor may suspend payments and extend repayment time to cover the period of active duty.