My company recently merged with another and now I have two different 401k plans. The company is planning on merging the plans for the employees early 07. I would like to take a loan out of the plan I have had established the longest but will not have paid it back completely by the time the plans are merged. I learned that whatever portion of the loan that isn't paid at that time of the merger will go into default and I will be forced to pay the taxes and possible penalties on the loan. It just doesn't seem fair that they can do that though. They won't allow us to redistribute or money ourselves but yet I will be penalized because they are doing it at a time when I am repaying a loan. Is there anyway around that?

I would ask your benefits administrator to ask for clarification from the IRS on this. Their thinking may be that they are terminating one plan and rolling over your funds into the other. When a plan is terminated, outstanding loan amounts can be considered a withdrawal.

However, there might be other alternatives to merge the plans rather then terminate. So your loan could also be merged. If they won't check with the IRS, then I would call them yourself.