Easily Track 401(k) Loans in R/3

  • by Dawn Burns, QA Manager, Howrey LLP
  • April 15, 2006
Want to increase participation in your company’s 401(k) plans? Consider offering 401(k) loans. These are easy to configure in SAP.
Key Concept
You can use United Way wage types M720 (donation — United Way), M721 (donation balance — United Way), and M722 (donation total — United Way) to create 401(k) loans. Because SAP’s documentation doesn’t mention this alternate use for United Way wage types, many people are unfamiliar with this easy way to track 401(k) loans in R/3.

The most popular form of retirement savings plans that employers offer in the United States is a 401(k) plan. Many US-based companies allow employees to contribute pre- or post-tax dollars. By allowing employees to participate in a 401(k) plan, employees can lower their taxable income. Employee participation in the plan also saves the employer money on the taxes that they must pay on behalf of the employee. To increase participation in 401(k) programs, some employers have granted employees access to money in their accounts by allowing them to take out 401(k) loans.

Employees can always access their 401(k) funds if they qualify for a hardship withdrawal. To do this, employees must provide proper documentation stating that they qualify for a hardship and may have to pay taxes on the money they receive. In some cases, they may also owe a 10 percent early withdrawal penalty fee. In states like California, an additional early withdrawal state penalty fee of a few percentage points also applies.

Loans allow employees to withdraw a portion of their 401(k) account without suffering penalty fees. They must repay the principal balance and any interest. If employees do not repay the principal amount back, the unpaid portion of the loan is taxable and they have to pay penalty fees on this balance.

Employees contribute 35 percent more to their 401(k) on average than participants in plans that don’t allow the loans, according to a 1997 US General Accounting Office report. The same report found that offering a loan created more of an incentive to contribute to the plan than even an employer-matched contribution.

To take out a 401(k) loan, employees contact the 401(k) administrator (in the company or at an outside firm) to request a loan packet. Employees complete the information and return the packet to the 401(k) administrator. The administrator sends employees a check from their plan as well as a coupon booklet to submit their repayment.

Alternatively, the administrator could set up an automatic payroll deduction. If your company automates the repayment process, you could easily set this up in SAP R/3 Release 4.0 and later, as well as in mySAP ERP Central Component (ECC).

Dawn Burns

Dawn Burns is an SAP-certified human resources senior consultant and Quality Assurance Manager and HR Consultant with Howrey LLP. She is a former SAP Human Resources instructor for SAP America and has more than 12 years of experience in human resources and information technology.

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