Borrowing against your contributions is just one of the services available to eligible members of The New York State & Local Retirement System (NYSLRS). But what happens if you have an outstanding loan, go off the payroll and your automatic loan payments are discontinued before the loan is paid off?
The answer is….it depends. If you leave your job because you’re retiring, then your benefit will be permanently reduced – you can’t pay off your loan once you’re retired. However, if you leave work for any other reason, you are required to make direct payment at least quarterly and complete repayment within five years from the date the loan was issued. If you fail to meet either of these conditions, your loan will default.
What Happens If My Loan Defaults?
If your loan defaults:
- We must report your outstanding balance, minus any previously taxed amount, to the IRS as a distribution to you.
- You must include the loan on your federal income tax return for the year it defaults. (If it was taxable prior to default, you will not be re-taxed on that portion of the loan.)
- If you’re under age 59½, you will be subject to an additional 10 percent penalty on the taxable portion of the loan. (There are no New York State or local taxes due on the distribution.)
- You still owe the balance to the Retirement System and the loan continues to accrue interest and insurance charges until it’s paid in full.
- We cannot issue a new loan until the defaulted loan has been repaid.
Take the Proper Precautions
If you leave public employment, contact us as soon as possible. We’ll tell you the exact amount you need to repay to avoid defaulting. When making a payment, be sure to write “loan payment” on your check and include your member registration number so we can apply it to the correct account. Mail payments to us at the following address:
New York State and Local Retirement System
Attention: Loan Unit
110 State Street
Albany, NY 12244
For more information about loans, you can contact us via this email form: https://nysosc9.osc.state.ny.us/product/ccsub.nsf/fsWeb?OpenFrameset. One of our representatives will respond back to you within 3 to 5 business days.