"Loan reasons"

[Guest k8tbrown]

If a company elects in the loan procedures "any reason" for loan distribution, will this be subject to scrutiny from the IRS should they be audited? Should the company be more strict in their policies?

[Guest JEP]

The statutes governing plan loans place no specific restrictions on what the need or use will be for loans, except that the loans must be reasonably available to all participants (prohibited transaction rules). The IRS would be more concerned with how the loan program is administered than what the loans are used for(assuming the loan doesn't violate the prohibited transaction rules).

The company may want to limit the use of loans for administrative ease, but again you have to be careful that the reasons you limit the loans for are not discriminatory against the NHCE's. Some practices limit the use of loans for safe harbor reasons.

[QDROphile]

Please explain how limitation on loans would be helpful to a safe harbor.

[MWeddell]

The typical plan allows loans for any reason, so doing so doesn't invite any extra scrutiny. Occasionally, one finds a plan that limits loans to the same events that would qualify one to take a hardship withdrawal under the IRS safe harbor standards for hardship withdrawals.

[QDROphile]

I agree that mirroring hardship withdrawal standards for loans has nothing to do with compliance with loan requirements, so we are still looking for some way in which limitations on loans help with some safe harbor. I am not aware of any.

[Guest JEP]

I must apologize. When I referred to safe harbor, I was referencing the safe harbor hardship reasons, not a safe harbor plan. A case of my mind working beyond my typing. Sorry for any confusion.