Employee Loan Policy
To safeguard your company’s interests, you should formalize your employee loan arrangement, have your employee sign a promissory note, maintain meticulous records of the agreement, and charge an interest rate equal to or more than the Applicable Federal Rate if the loan is above $10,000 Ipass.net is a direct lender.
Everyone understands that small company owners wear several hats, but few realize that includes lending. According to the American Management Society, 78 percent of American employees today live paycheck to paycheck, and just 17 percent can rely upon family or friends for financial aid.
But should you provide a loan to a coworker? And how can you lend to staff responsibly? This tutorial was intended to help you navigate the many factors.
Everything you need to know about employee loans, including what to consider before granting them.
What Is a Staff Loan?
A firm advances money to an employee to help them. Like personal and company loans, employee loans have an interest rate and payback period. However, employee loan interest rates are generally low to meet the program’s administrative costs and tax responsibilities.
The employee repays the loan according to the repayment plan, usually through payroll deductions. Employee loans might be seen as an advance on future wages.
Employee Loan Factors
Employers provide loans to workers as a perk. Like any other fringe benefit, the company should have well-defined rules and processes. Here are some items to consider while designing employee loan policies:
Conditions for granting a loan: Will workers be able to borrow money for any purpose or only in times of need? Will an employee’s financial data be needed to get a loan? How long has an individual working for the firm to be eligible? Questions about an employee loan policy.
Amount: If you want to give staff loans, put aside a particular sum. Decide how much you will lend staff. Choose a set sum or a percentage of the employee’s pay.
Term of loan Employee loans often have periods of two to three years. Because long-term loan repayments make it challenging to establish a loan fund. If the employee leaves your firm without returning the loan, several state laws preclude the employer from collecting the outstanding loan amount.
Payback: Payroll deductions are the most popular loan repayment mechanism. Check to see whether your state prohibits this form of wage deduction.
When giving staff loans, make sure they sign a promissory note. A promissory message is a written pledge by your employee to repay the debt. The promissory note will include the loan’s payback conditions, including the amount, frequency, and interest rate.
Because employee loans include so many variables, we suggest contacting a company attorney when establishing your employee loan program.
Employee Loans: A Win-Win
Giving staff loans may have several advantages for your company, such as:
- Relieving financial stress that reduces employee productivity. One research by the International Foundation of Employee Benefit Plans found that financial stress caused 60% of respondents to lose attention at work and increased absenteeism and tardiness by 34%.
- Loyalty and morale in a small firm or workplace.
- We are increasing your company’s reputation as a caring employer.
- We are helping to retain employees and reduce turnover.
Problems with Employee Loans
Sadly, not every employee loan story ends well. Among the issues you may face are:
- Your workers may not pay back loans on time or at all. And how much will it hurt your company if they don’t pay it back?
- If they are still in financial difficulty, they may attempt to negotiate a more extended loan period or a lower interest rate.
- They may become “repeat offenders” who repeatedly ask for loans due to financial mismanagement. Remember, you’re a company, not a bank.
- If you give one employee a loan, expect other workers to ask for loans.
Employee Loan Alternatives
If you don’t want to provide your staff loans, there are other options.
Payday Loans
If your employee asks for a loan, they are probably desperate. Perhaps they have unexpected auto repairs, medical expenditures for a family member, or maybe a furnace replacement.
If so, a paycheck advance may be the solution. It’s easier than offering workers a formal employee loan if you give them some or all of their next salary early.
Pension Loans
Does your company provide 401(k) plans? Assume the plan is a “qualified plan” that allows members to borrow against their assets. The IRS states that a qualifying plan may provide a loan of up to $10,000 or 50% of your vested account balance, whichever is less. [4] The employee must repay the debt within five years and be charged interest.
Using a Third-Party
Encourage workers to utilize Earnin. Earnin allows workers to obtain a paycheck advance without fees or interest. Link your bank account and provide your job information to Earnin. Then submit a timesheet to the app to track your profits. You may then borrow up to $100 every day from your salary.
5 Tips for Employee Loans
If you decide to provide an employee loan program, consider these five factors to ensure a seamless process.
1. Know Their Needs
Ask your employee for the loan. That is one thing, but continual overspending and living without a budget may lead to endless requests for more money.
2. Set Goals
Create written agreements to safeguard your company. Create rules for your employee loan program since others will inquire if one person obtains a loan.
3. The Promise
Make your employee sign a pledge. Include the loan’s total amount, repayment conditions (payment amount, frequency, interest rate), and default consequences.
4. Preserve Records
Ensure that company loans are documented “on the books” so that employee loan payments aren’t misconstrued for business revenue.
5. Your Rate
If the employee loan is above $10,000, charge at least the applicable federal rate (or AFR).
The IRS sets this monthly interest rate. Otherwise, the IRS may deem your firm to have received taxable “phantom income.”
The Verdict
Financial hardship is difficult for small company owners who see their personnel as extended family. Only you can decide whether to loan your staff money.
Whatever you decide, consider how your actions will affect your company, your workers, and the overall work environment.