Leaderboard

I'm not sure the OP is saying the 2 loans weren't outstanding at that same time which is what the IRS example highlighted is talking about. The maximum loan is the lesser of 50% of the vested account balance (minus outstanding loans), or $50,000 reduced by the highest outstanding loan balance in the last 12 months. It's not 100% clear if the $78,150 above is inclusive of the loan balances - I'm assuming it's not. (if it is, it's still the same answer anyway). Therefore if the OP pays off loan #2: 50% of the vested account balance reduced by the remaining loan #1 is $37,775 - $104,150 X 50% minus $14,300. (if the $78k includes the loans, the amount here is $24,775). $50,000 minus the highest outstanding loan balance in the last 12 months is $17,330. Maximum new loan is $17,330. With these facts, it would be the same regardless of which loan was paid off or if both loans are paid off.

This is why loans are a nightmare and shouldn't be offered in a plan!

That is not how an FSA works. The employee enrolls for a fixed amount per pay period. The total amount for the year is fully available for reimbursement on the first day of the year. If the OP has valid reimbursements that exceed their contributions to date, the reimbursements must be paid and the employer is prohibited from seeking any repayment from the employee. This works both ways. If the employee has contributed more than than submitted qualified expenses. Any balance remaining after separation is forfeited.

When there are 2 loans involved, the calculation is not entirely clear. So providers use a reasonable interpretation of the rules and allow the total principal lent in a 12 month period to be $50k, taking into account all loans taken in the previous 12 months. That is why the amount is the same regardless of which loan is repaid.