My colleges and I are having a disagreement on the following example:

Participant has an account balance of over $200,000 at all times during this period.
3/1/05, Participant takes a loan of $30,000
12/5/05, Participant repays the $30,000 loan balance
12/6/05, Participant takes a loan for $20,000
12/15/05, Participant requests another loan. What is the maximum loan amount he can have?

1. Since the highest amount a participant can have in a 12 month period is $50,000 he cannot receive another loan until 12/16/06.

2. On 12/15/05 he can take a loan of $30,000.

Please let us know which one is correct. Thanks.

The rule is ..........

$50,000, reduced by the excess (if any) of:

a. The highest outstanding balance of loans from the plan during the one-year period ending on the day before the date on which the loan was made, over

b. The outstanding balance of loans from the plan on the date on which the loan was made; or


For highest outstanding balance (o/s) you look at past 365 days to see what the highest number was during the year. In this case the highest o/s balance would be 30K. o/s balance on 12/15 would be 50K (assuming that is what he wants). So you reduce the maximum 50,000 loan limit by 33,000/50,000 and the most he can have is 30,000.

Had this same deal with doctor years ago who thought he could borrow 50K and pay it back in couple months and take another loan.

I am not sure where Janet came up with her calculations (33,000/50,000?) but her answer is right. I calculate it as follows: The highest outstanding loan balance is $30,000 reduced by the current loan balance of $20,000. This gives us $10,000 that we need to reduce the max of $50,000 by which is $40,000. You can't go over $50,000 outstanding so reduce the $40,000 to $30,000.

Thanks. I'm looking at a resource that shows the following formula:

((IRS max limit - existing loan balance - (highest outstanding loan in last 12 months - existing loan balance)) = maximum loan participant can take.

$50,000 = Max IRS limit allowed to this participant
-20,000 = Current outstanding loan
$30,000

-10,000 = ($30,000 highest loan - $20,000 existing loan)
$20,000 = maximum loan amount


Archimage you said they could have $30,000, this formula says they can have $20,000. What am I missing? Thanks.

You need to reduce the $50,000 max by the $10,000 figure. Your example is missing a step. You must reduce the maximum loan amount ($50,000).

Okay. Thanks for being patient. Let's see if I can get this striaght:

$50,000 - [highest outstanding loan - current loan] - current loan = maximum loan can take

I can see different results depending on the facts:

Example 1:
3/1/05, Participant takes a loan of $30,000
12/5/05, Participant repays the $30,000 loan balance
12/6/05, Participant takes a loan for $20,000
12/15/05, Participant requests another loan.

12/5 $50,000 - $30,000 = $20,000 maximum loan
12/15 $50,000 - $10,000 ($30,000 - $20,000) = $40,000 - $20,000 = $20,000 maximum loan
Total outstanding loans $40,000

_____________________________________________________________________________

Example 2:
3/1/05, Participant takes a loan of $20,000
12/5/05, Participant repays the $20,000 loan balance
12/6/05, Participant takes a loan for $30,000
12/15/05, Participant requests another loan.

12/5 $50,000 - $20,000 = $30,000 maximum loan
12/15 $50,000 - $.00 ($30,000 - $30,000) = $50,000 - $30,000 = $20,000 maximum loan
Total outstanding loans $50,000

______________________________________________________________________

Example 3:
3/1/05, Participant takes a loan of $50,000
12/5/05, Participant repays the $50,000 loan balance
12/15/05, Participant requests another loan.

12/15 $50,000 - $50,000 ($50,000 - $.00) = $.00 maximum loan
Total outstanding loans $50,000
Here the participant will need to wait until 12/7/06 to request another loan

I had thought the entent of the law was to only allow no more than $50,000 of all the highest outstaning loan amounts for one 12 month rolling period. Thus, for each loan taken in a twelve month period you would add together the highest outstanding loan amount resulting no loan amount in all in all three scenarios. The participant would not be able to take another loan for a year.

Example 1: $50,000 - $30,000 [($30,000 = highest loan one + $20,000 = highest loan two) - $20,000 = current loan] = $20,000 - $20,000 = $.00
Example 2: $50,000 - $20,000 [($20,000 = highest loan one + $30,000 = highest loan two) - $30,000 = current loan] = $30,000 - $30,000 = $.00
Example 3: $50,000 - $.00 [$50,000 - $50,000] = $50,000 - $50,000 = $.00

Something does not compute. ha ha Please show me you math for each of the scenarios.

I copied it right out of the distribution answer book. Entire Q is the following.

Q 2:4 What limits does the Code impose on the amount of a plan loan?

A plan loan is not treated as a taxable distribution (i.e., a deemed distribution) to the participant or beneficiary to whom it is made if its amount (when added to the outstanding balance of all other loans from the plan and all other plans required to be aggregated with the plan) does not exceed the lesser of:


1. $50,000, reduced by the excess (if any) of:

a. The highest outstanding balance of loans from the plan during the one-year period ending on the day before the date on which the loan was made, over

b. The outstanding balance of loans from the plan on the date on which the loan was made; or

2. The greater of:

a. One half the present value of the vested accrued benefit of the employee under the plan, or

b. $10,000.

[I.R.C. §72(p)(2)(A)]

For purposes of item 2a, the vested accrued benefit is determined without regard to any accumulated deductible employee contributions (QVECs). [I.R.C. §72(p)(2)(A)] Also, for purposes of 2a, in determining an employee's vested accrued benefit under the plan, a valuation within the last 12 months may be used. This value must be adjusted for any distributions or contributions made after the relevant valuation date and before the date the loan is made, but it does not have to be adjusted for subsequent gains or losses after the valuation date and before the loan date. [Notice 82-22, 1982-22 C.B. 751] If an employee's outstanding loan balance is not more than one half of the present value of his or her vested accrued benefit under the plan immediately after the loan is made, the loan is not treated as a taxable distribution (i.e., a deemed distribution), if that present value later decreases, including a decrease because of a distribution made to the employee. [Staff of the Joint Comm. on Taxation, General Explanation of the Revenue Provisions of the Tax Equity and Fiscal Responsibility Act of 1982, H.R. 4961, 97th Cong., 2d Sess. (1982) (the "TEFRA Bluebook") at 296]

Your confusing two different things. Here is the calculation for your first example:

Step 1:
30,000 is highest loan balance
(20,000) is current loan balance
10,000 is the difference

Step 2:
50,000 is maximum amount that can be taken out
(10,000) is the amount from step 1 that we use to reduce the maximum
40,000 is difference.

Since 40,000 + 20,000 is more than the legal amount of $50,000 you have to reduce down to $30,000.

Not sure if anyone is still interested in this question, but the answer to DTH's original question is $20,000 not $30,000. DTH's formulas in the later posts are correct. The calculation is as follows:

Highest Outstanding Loan Balance over last 12 months (HOLB) = $30,000

Current Outstanding Loan Balance (COLB) = $20,000

Excess of HOLB over COLB = $10,000

$50,000 - Excess of HOLB over COLB = $50,000 - $10,000 = $40,000

The way the regs read are that the current outstanding loans plus new loans cannot exceed $50,000 reduced by the excess of HOLB over COLB. In this case, that limit is $50,000 - $10,000 = $40,000. Since there is already a loan for $20,000, the max. available for loan is $40,000 - $20,000 = $20,000.

In the later posts, the calculations should be as follows:

Example 1:
HOLB=$30,000
COLB=$20,000
$50,000 - $10,000 = $40,000 - $20,000 (current bal) = $20,000

Example 2:
HOLB = $30,000
COLB = $30,000
$50,000 - $0 = $50,000 - $30,000 (current bal) = $20,000

Example 3:
HOLB = $50,000
COLB = $0
$50,000 - $50,000 = $0 - $0 (current balance) = $0

All of DTH's calcs are correct in the last post.

Janet M:

Those arrangements were common many moons ago. That's why Congress enacted the limitations on plan loans that are contained in IRC section 72(p) as part of TEFRA 1982.

Following up on calculating maximum loan amounts...I'm confused on one aspect. Can the maximum allowable loan + the outstanding loan actually exceed 50% of the account balance? This would apply to vested account balances below $100,000.

Example:

Current Account Balance = $55,000
Maximum Loan #1 amount within past year = $20,000
Current Loan balance = $18,000

First part of calculation then

$50,000 - $20,000 = $30,000 (or $50,000 - $2,000 - $18,000)

Second part:

50% * $55,000 = $27,500

Maximum Loan #2 = minimum of two parts, or $27,500.

Sum of two outstanding loans at date of loan #2 then is $18,000 + $27,500 = $45,500.

Am I misinterpreting something here?

The sum of the existing loan(s) and the new loan cannot be more than the lower limit. So from the lower limit, you deduct the existing loan(s) balance to determine the maximum amount the new loan can be.

One of the two limits is, on your scenario, $48,000 ($50,000 - 2,000). $2,000 being $20,000 (highest outstanding balance in past 12 months) less $18,000 (current outstanding balance).

But the other limit is lower, $27,500 (1/2 of $55,000 vested benefits balance).

So, the new loan amount can be no more than $9,500 ($27,500 lower limit - 18,000 current loan balance).

Thank you for that late Sunday night response. The first part of this post is pretty much a repeat of yours, just verifying that I got the concept down.

It is not the 'new loan limit' that is the minimum of the two calculations, but rather the 'limit of total outstanding loans' that is being calculated.

A better result then for the first calculation is $48,000 (rather than $30,000), second part $27,500. Upon taking the minimum of those two, then the current outstanding loan balance is subtracted, or $27,500 - $18,000 = $9,500.

Another way for me to think about it is that the purpose of the $50,000 limit is to restrict maximum loan balance in past year + new loan to $50,000. The second part, or 50% limit, is not to restrict max loan balance in past year + new loan to 50% of current balance but rather to limit current value of outstanding loans to 50% of current balance.

I think that sums it up.