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I found this whole discussion a little humorous. For us old folks who worked on plans in the days before daily valuation and employees being responsible for self-directing their accounts, loans were ALWAYS just another investment in the plan and the interest from the loan repayments was part of the overall investment return that was allocated pro-rata to all participants. When I started in this business, this was everyday plan accounting. Of course, it is not as common now with daily valuation and self-direction, but it is absolutely permissible. In a pooled account, the loan is a plan asset, like any other investment, but if the participant defaults, then the defaulted loan amount is only assigned to the borrowing participant, meaning the participant's account is offset and the participant gets a 1099.

I think Dave missed the "new plan" part. I will ask for as much history as they have regarding hours and salary.

Just to be clear on this, there is no negative rate of return on a default. Interest on the loan has accrued and the full balance is "seized." I am absolutely confident that there are no "issues" that the plan should be concerned about with pooled loans - if a sponsor wants to make loans self-directed for reasons of "fairness" or whatever, that's one thing - but for the plan's safety - no.

Stopping the IRS from auditing all forms. Maybe it is the CPA in me but from my first job at the IRS the idea there are forms you can't audit because of the statute of limitations happens was talked about as important. You can say that is pretty small in this case. Maybe it is a small benefit. But the cost is very small. It has been a very long time since I worked on this small of plans but we had all the information to complete the form to do the work we did for the client. All you had to do was have some input done and a quick review. Low cost maybe low benefit but I will take for the cost.

I hear you kgr12 but then there is no protection for the participant from a change of heart or change of control (but not Ch. 11).

To those who feel that there is some problem with allowing participant loans as a pooled investment, remember that participant loans are also permitted in DB plans.