Everything You Need to Know About Employee Loans

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American Management Society Survey
According to a survey by American Management
Society, around 79 of Americans live on paycheck
to paycheck, and around 17 resort to their loved
ones for financial help, making employee loans
more common.
The question is how you support an employee if he
or she asks for a loan. How you do it
responsibly?
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EMPLOYEE LOANS
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• The reasons of providing a loan should be clear.
  Whether its for financial assistance or any
  other reason. What should be included in the loan
  documentation? Is the employee eligible for an
  employee loan? What is the eligibility criteria?
• Since you cater to your employees need, its
  better to ask them why they need money. Asking
  for a financial assistance for a one-time
  emergency or an unanticipated event is OK, but
  continuous overspending may lead them to borrow
  repeatedly.
• Creating guidelines and formalizing employee loan
  program should be your next step. This is
  essential because if you offer loan to one
  employee, others will ask as well.
• What will be the loan amount? Every employer
  should set aside a specific amount for the loan
  program. Is it going to be a fixed amount, or is
  it going to be a portion of the employees
  salary?
• What will be the repayment method? Is it going to
  be a payroll deduction?
• If the loan amount exceeded 10,000, charge the
  Applicable Federal Rate (AFR) on interest.
  Non-charging of the interest rate will leads to
  taxation, since the IRS will consider it as
  phantom income.

• What will be the term of the loan? Generally,
  these loans have shorter repayment terms ranging
  from two to three years. Longer repayment terms
  are harder for the employer to maintain a fund
  for loans. It will also become arduous if the
  employee leaves the company before repaying the
  loan. In addition, there are laws in some states
  that preclude the employer from recovering the
  loan.

• Having a promissory note drawn up can be an
  intelligent step before issuing loans to
  employees. This will outline the loans terms
  such as repayment amount, frequency, interest
  rate, and what happens if the employee defaults.
  Consulting with a business attorney is
  recommended while setting up your employee loan
  program.

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An added stress when repaying loans. Some
employees might not make timely loan payments, or
worse, not pay at all.
If they are unable to pay back the loan, they
might negotiate increasing the loan term or
reducing the interest rate.
Offering loans to one employees means preparing
others to make loan request as well.
Increased in employer tax obligations
Providing benefits costs more for small employers
than for large ones, both in terms of higher
prices because of lesser buying power, and due to
relatively higher costs of administration.
Less choice in drafting a retirement plan due to
administrative costs.
The more benefits you offer, the more you have to
pay in terms of administrative cost. And
providing financial benefits leads to legal
compliance, making company to incur legal fees.
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Alternatives Options to Employee Loans
If youve decided not to extend loans to your
employees, there are some alternatives for
financial aid that could help your employee when
they needed the financial assistance.
Paycheck Advance
Retirement Plan Loans
Third-Party Financial Apps
A loan from an employees 401(k) can be another
solution if your business offer 401(K) plans. In
this plan, employees can borrow up to 50 against
an account balance, up to 50,000. 401(K) plans
charge a reasonable interest rate with repayment
terms up to five years. Though, if an employee
leaves your company, they will have to repay in
full, else their unpaid balance will be
considered as a taxable distribution.
Another best approach is to inspire employees to
use third-party apps like MoneyLion, Brigit,
SpeedyCash, PayActiv and Earnin. With these
services, employees get an advance on their
paycheck without any interest or fees. The
process is simple connect your bank account and
add your employment info to help third party
services identify your pay schedule. Add your
income to the app by uploading an electronic
worksheet to be able to borrow up to 100 daily
from your pending paycheck.
The first alternative to an employee loan is a
paycheck advance being a simple solution when
your employee is s hitting a financial rough
patch. With a paycheck advance, you can reduce
your businesss potential loss to the amount of
one paycheck by providing your employees some of
their paychecks early. This is also an easy
alternative to an employee loan especially when
your employee need a short-term financial
assistance.
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The Conclusion
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