Default Loans

[Guest Jim Jesikiewicz]

I have a default loan question I would like to tap some expertise on.

We have a participant who defaulted on a loan. The amount of the loan when it went into default was $20,158 back in 9/1999, The guy wants another loan. The current running interest loan balance is now $25,740.

When taking into considering the amount of his vested balance which would you take for coming up with his vested balance:

1?) 20,158 + his current vested balance of 30,444 or

2?) 25,740 + his current vested balance of 30,444

then we would take 50% of either option 1 or 2 above less the outstanding loan balance

We are busting our brains in trying to interpret loan language we rarely use.

[QDROphile]

My vote is that interest keeps accruing and is part of the loan balance at the time you do the calculation of eligibility for the new loan.

[Richard Anderson]

Does the Plan Administrator have a fuciduciary obligation to not approve a loan when the chance of non-payment is substantial?

[Kirk Maldonado]

I agree, but it would be best if the plan provided discretion to refuse to allow loans in these circumstances.

[KJohnson]

The 72(p) regs proposed last year, Q&A 19, specify that the defaulted loan and all accrued interest should be considered in determining the permissible amount of any subsequent loan. I am nor sure whether the IRS considers this a "new" rule or simply a clarification of old rules.

What is new, in Q&A 19 is the requirement of additional security for a loan after a defaulted loan. I think the IRS has taken some heat on this proposal and I am not sure of the status of these proposed regs.