401K Loan Limitation after a prior loan is paid off

[pecan204]

Folks can anyone point me to clear defining regulations that say a maximum amount of a new loan request has to be determined by reducing the maximum permitted loan by the highest outstanding balance in the last 12 months?

I have a situation that Ascensus is refusing to permit any loan over what they say is a 12 month look back period. I had a loan that was completely repaid on June 29, 2016. The loan since June is not outstanding.

By the Ascensus Calcs: now 95K is vested. So a maximum allowed is 8616$.

50,000-(maximum outstanding in last 12 months)=50,000-41383.71=8,616.29$ is what Ascensus says is my maximum new borrowing allowance.

From everything I read in the CFR indicates that look back should only apply when there are prior existing loans that are outstanding in that all loans cannot exceed the maximum 50K.

In my case I currently do not have any outstanding loans.

Thanks for your reply.

Ken

[K2retire]

Ken,

The rule is that the sum of the new loan and the highest outstanding balance of any loans in the previous 12 months cannot exceed $50,000.

[Mike Preston]

Here is a cite that may help clarify:

http://www.irs.gov/Retirement-Plans/Retirement-Plans-FAQs-regarding-Loans#6

Note the part where it says:

"Because the law bases Jim’s maximum loan on all of his loans during the 12 months prior to the new loan, there isn’t a significant advantage for Jim to pay off his first loan before requesting a second."

Here's a calculator you might find helpful:

http://wix-dropbox.elasticbeanstalk.com/link-to-file?instance=LQ4VqWbzSBsC04fG-BMtBOGrPWAycXcQhGfxhqdXuQ8.eyJpbnN0YW5jZUlkIjoiMTM0ODg1NDgtZWIzZS01NDlmLTk2OGItZDY1ZWNkZjJmYzUzIiwic2lnbkRhdGUiOiIyMDE2LTEwLTExVDE3OjE0OjE4LjM3M1oiLCJ1aWQiOm51bGwsImlwQW5kUG9ydCI6IjcwLjIxNC40NS4yMTcvMzM4MzciLCJ2ZW5kb3JQcm9kdWN0SWQiOm51bGwsImRlbW9Nb2RlIjpmYWxzZSwiYWlkIjoiOGY0OWRjMzUtMTg3MC00MGQwLTgxOGEtYjlhOTMxZDFlNTEwIiwiYmlUb2tlbiI6ImY2M2YzNmNlLWRjYmUtMTQxYy0zODY4LWNiYWYyNGJiY2M5YiIsInNpdGVPd25lcklkIjoiZmEzY2E1M2YtNzVlMy00ZDI5LWE0YmYtOWQwM2RlMTU5OWYyIn0&compId=TPWdgt1-mgz&path=%2FDropbox+folder+App%2FLoan+Maximum+Calculator.xls

[Lou S.]

It is right in the tax code §72(p)(2)(A)

(2) Exception for certain loans

(A) General ruleParagraph

(1) shall not apply to any loan to the extent that such loan (when added to the outstanding balance of all other loans from such plan whether made on, before, or after August 13, 1982), does not exceed the lesser of—

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

(I) the highest outstanding balance of loans from the plan during the 1-year period ending on the day before the date on which such loan was made, over

(II) the outstanding balance of loans from the plan on the date on which such loan was made, or

(ii) the greater of (I) one-half of the present value of the nonforfeitable accrued benefit of the employee under the plan, or (II) $10,000.

For purposes of clause (ii), the present value of the nonforfeitable accrued benefit shall be determined without regard to any accumulated deductible employee contributions (as defined in subsection (o)(5)(B)).

[austin3515]

Here is an example too. John takes out a $50,000 loan on January 15th 2016 and repays it in full on March 15th of that same year. John cannot take ANY loans until January 15, 2017. Sounds ridiculous but absent these rules, John could take out $50,000 and repay it every 12 months and continue to roll the loan and never actually repay it. The point of these rules is to avoid John essentially never repaying the loan.

[TPAJake]

Ascensus got something right?!

[ETA Consulting LLC]

If the plan is written to allow for more than one loan, then you may still borrow more than $8,616; you'd just have to take a series of loans.

The analysis would be as follows (assuming the plan allows for 3 outstanding loans).

1) You apply for a loan today. The highest outstanding loan balance during the past 12 months was $41,384. Your maximum available is $8,616. You take that loan.

2) The following day, you apply for a 2nd loan. You currently have an outstanding loan of $8,616 and plenty of vested balance. Your highest outstanding loan balance during the past 12 months was $41,384. Your maximum available for a 2nd loan is now $8,616. You take that loan. Your current outstanding loans is now $17,232.
3) The following day, you apply for a 3rd loan. You currently have outstanding loans of $17,232 with plenty of vested balance. Your highest outstanding loan balance during the past 12 months was $41,384. Your maximum loan available for a 3rd loan is now $8,616. You take that loan. Your current oustandings loans is now $25,848.

This is reflective of a literal interpretation of Section 72(p) and the IRS Regulation. The IRS attempted to change the Regulations to limit this method back in 2000, but the Final Regulations issued did not include such language. So, as long as your plan allows for more than one loan to be outstanding at a single time, you may increase your loans by merely taking 2nd and 3rd loans.

You may have personal feelings about it, but this is currently how the rules are written. A prior ASPPA exam back in the late 1990s asked a short answer question on this same issue :-) This was back during my study and research days. Yes, some of us are that old

Good Luck!

[austin3515]

2) The following day, you apply for a 2nd loan. You currently have an outstanding loan of $8,616 and plenty of vested balance. Your highest outstanding loan balance during the past 12 months was $41,384. Your maximum available for a 2nd loan is now $8,616. You take that loan. Your current outstanding loans is now $17,232.

"Your maximum available for a 2nd loan is now $8,616." How can you take that loan? Your max available is 8,616 and it is already outstanding after the first loan?

[TPAJake]

I'm not sure I could defend that particular calculation either... I'm not saying ETA is wrong, but I would be afraid of that coming back to haunt me later.

[austin3515]

For the record, I am saying he is wrong. At least I hope he is, because otherwise I would be forced to use this approach in the right situation and it would be a lot of extra work! I am definitely looking forward to rebuttal arguments, don't get me wrong. I've seen ETA right about a LOT of things before, so my curiosity is piqued...

[RatherBeGolfing]

I'm fairly certain that ETA is correct that a literal reading of 72(p) actually allows for this. This is because the statute does not specifically state that you have to carry over your adjusted limit in the second loan to the third loan.

From the EOB

Applying the $50,000 limit when there are more than two loans in a 12-month period. Where there has been more than two loans in the last 12 months, remember to take the highest outstanding loan balance at any time in the 12-month period, and subtract the current loan balance at the time of the new loan to determine the adjusted maximum loan limit. As the following example illustrates, it is possible to lend out more than $50,000 in a 12-month period provided the outstanding loan balance at any time is not greater than the adjusted maximum dollar limit.

[ETA Consulting LLC]

I've seen ETA right about a LOT of things before, so my curiosity is piqued...

LOL. Honestly, the rule that I stated shocked me back in late 90's when I saw it in operation. I had the same objection at that time. Upon my research, I concluded that this was, in fact, the case. I remember back in 2000 (or 2001) the IRS issued "Proposed" Regulations that seemed to address this (to actually restrict the number of new loans during a single year), but the Final Regulations did not include that language.

Good Luck!

[austin3515]

Attached is the full page from EOB. I think there is only a very limited opportunity to exploit the hole in the regs. I still maintain that what I said before is correct - you can't take that second loan for 8,616. The EOB makes it clear that you're loan balance cannot exceed the maximum available. There example "threads the needle" so to speak. Let me know what you think,.

201610180851.pdf

[RatherBeGolfing]

Austin, how does the opportunity to exploit the hole in the regs apply to one and not the other?

I agree, the example ETA brought up is more extreme than the example in the EOB, but I just don't see that there is anything in the statute to suggest a limited opportunity to use the loophole.

The EOB also states that Treasury could (but have not) seek an interpretation that would preclude loaning out more than $50,000 in any 12 month period when there are more than two loans. Without such guidance, the loophole is still available.

[austin3515]

OK, but tell me what I'm missing in my analysis. Just before Loan 2, the outstanding loan balance is 8616 and the max is 8616. So how can the new loan be taken?

[Kevin C]

We had a similar situation come up last year. Because of a large loan balance in the prior 12 months that had been paid off, the participant could not borrow what he wanted. The plan allowed two loans. After taking a loan for the maximum, he got on-line and Relius was showing that he could take another loan. I worked through the numbers and sure enough, he was eligible for another loan. It's not logical, but that's how the rules work.

Austin, what you are missing is that the $50,000 is reduced by the excess (if any) of the highest outstanding loan balance in the prior 12 months over the current loan balance. When he takes the first $8,616 loan, that changes the adjusted $50,000 limit to $17,232.58 ($50,000-(41,383.71-.8,616.29)). When you subtract the current $8,616 balance from $17,232, he can take another $8,816, IF the plan allows a second loan.

[ETA Consulting LLC]

OK, but tell me what I'm missing in my analysis. Just before Loan 2, the outstanding loan balance is 8616 and the max is 8616. So how can the new loan be taken?

Because, on the day of the 2nd loan, here's how the participant's account looks.

Account Balance in Funds: 90,000

Loan Balance: 8,616

Total Balance (including loans) 98,616

50% of Vested Balance $44,308

Current Loan: 8,616

Additional Loan Available under 50% vested: 35,962

Highest Outstanding Loan Balance during past 12 months: 41,384

Maximum loan Available for the 2nd loan is lesser of $8616 or 35,962

The first loan of 8616 does not serve to increase the highest outstanding loan amount during any time for the past 12 months.

Does this help?

[austin3515]

Wow. I just plugged this scenario into my very own battle tested loan worksheet, and low and behold it is as ETA suggests. If I say the current outstanding loan balance is zero, max loan is 8,616. If I say the outstanding loan is 8,616, the max loan is again 8,616.

[RatherBeGolfing]

Wow. I just plugged this scenario into my very own battle tested loan worksheet, and low and behold it is as ETA suggests. If I say the current outstanding loan balance is zero, max loan is 8,616. If I say the outstanding loan is 8,616, the max loan is again 8,616.

Like Kevin said its not logical but it is how the rule works. That third loan throws a curve-ball into the highest outstanding & current outstanding equation.

Most of my plans only allow for one loan at a time so this is more of a theoretical exercise for me

[austin3515]

Well I guess if I can phrase it a different way, every time you borrow another dollar, the reduction to the $50,000 cap is reduced by the same dollar. Absolutely fascinating!

[ETA Consulting LLC]

Wow. I just plugged this scenario into my very own battle tested loan worksheet, and low and behold it is as ETA suggests. If I say the current outstanding loan balance is zero, max loan is 8,616. If I say the outstanding loan is 8,616, the max loan is again 8,616.

When I managed teams in Corporate America, we lived for these moments. It's often not about right or wrong, but working to find out exactly what you disagree about and working to reconcile those disagreements. At the end of the day, you'll either agree or agree to disagree, but you'll know why

That's my pep talk for today.

Good Luck!

[TPAJake]

I can't believe I actually agree after that exercise...MIND BLOWN

[AlexRes]

This thread is old but I’m hoping some of you are still following. Does the 12 month look back period apply to loans taken out of different plans obtained through different employers?

specifically, I had a loan of roughly $35,000 at this time last year at a previous employer. I left employer A in May and paid off the outstanding loan balance. I’m now working for employer B and am rolling over the balance of my prior plan (roughly $200,000) into employer B’s 401(k). If I want to take out a new loan from this different plan, is the most I’m eligible for $50,000 OR is it $50,000 - $35,000 = $15,000. All the examples I’m seeing that cite the tax code referring to taking out new plan loans when you’ve had an outstanding balance within the past 12 months on a prior plan loan make me wonder if it’s specific to loans literally taken out against your retirement savings in ONE particular plan (I.e. only plans from one employer) or is “plan loan” being used in a more generic sense and the limits of loans requested against my new retirement plan with employer B are subject to a 12 month lookback on loans I’ve had against any retirement plan, including those from a previous employer? I’m not a financial expert so my apologies if this doesn’t make sense or seems like a foolish question.

[Mike Preston]

10 hours ago, AlexRes said:

This thread is old but I’m hoping some of you are still following. Does the 12 month look back period apply to loans taken out of different plans obtained through different employers?

 

No.