What are the considerations when giving employees company loans?

There are a number of situations in which employees may ask their employer for a company loan. For example, the employee may be purchasing a house, sending a child to college or making other large purchases, or the employee may be experiencing a personal hardship. Like any other benefit offered to employees, establish a clear policy that states the details of the loan program and sets the stage for a consistent practice among all employees. Factors to consider for the employee loan program include the following:

• Circumstances under which employees will be granted a loan. Determine whether loans will be granted only when there is a hardship or for any reason. If only for hardships, decide whether documentation of the hardship will be required, and if so, what type of documentation will be acceptable. In addition, decide if eligibility will be based on length of time with the organization, such as at least one year, or if any employee regardless of length of tenure will be eligible.
• Amount of the loan provided to employees. It is usually beneficial to set aside a particular amount for the overall loan program as well as the amount that will be loaned to employees. Once the amount of the program has been allocated, the individual loan payments by employees could make the program self-sustaining. One way to determine the individual loan amounts could be a percentage of salary; or you may decide to have a maximum limit for all employees.
• Length of the loan. Most employers find it best to keep the loan period short, such as two to three years. One reason is that if the payments last many years, it becomes more difficult to have a self-sustaining loan program. In addition, if the employee does not make payments or terminates employment, some states’ wage deduction laws or payment upon termination laws prevent the employer from recovering the unpaid loan amount.

Repayment method. The easiest way to collect loan payments is through payroll deductions; however, check with your state’s wage deduction laws to make sure your state has no restrictions. Federal law will allow these deductions where loan repayment terms are made clear. Also establish when the repayment begins, the amount of each payment, when each payment is due, the number of payments and the interest rate. Even though the employer is generally only charging an interest rate or administrative fee to cover the costs of administering the program, organizations should understand whether there will be any tax consequences of offering a loan program.

If you decide to offer employees loans, have a written loan agreement signed by the employee, and establish clear loan guidelines in a policy that also explains how to apply for the loan, who is responsible for administering the program and who makes the loan decisions. You may want to consult with an attorney before deciding to offer employee loans to make sure you have considered all factors and have the attorney assist with the policy and loan agreement.