Waiting time for new loan?

[Guest bmurphy]

Plan allows for loans, only one outstanding at a time. In reading Treas reg 1.72(p)-1 it appears to state that if two or more loans are made during the year, the next loan taken would result in a deemed distribution. Is anyone aware of a waiting period between requesting loans? Participant took out loan last month & now wants to refinance. They are within the 2 loan limit but wasn't sure if they needed to wait any length of time.

[Belgarath]

No specific waiting period. Unless the plan has one. But you are correct that more than two loans in one calendar year (or plan year or other consistent 12 month period that the plan designates if plan doesn't wish to use calendar year) will result in a deemed distribution.

[Mike Preston]

Belgarath, don't you mean the 3 loan limit? Se Q&A 20 (a)(3) of 1.72(p)-1 (proposed regs).

If the plan only allows one loan at a time, the old loan can be retired at the same time that the new loan is created. There is no requirement for a waiting period that I could find in the final or proposed regs.

[Belgarath]

Hi Mike - no, I meant the more than two loan limit. There's no 3 loan limit that I saw in Q&A-20. If two loans have already been made, the third is a deemed distribution. The following is an excerpt and example - is there something else going on I don't know about (very possible!)?

PROP-REG, PEN-RUL ¶20,249, IRS proposed regulations: Plan loans: Qualified plans: Refinancing: Multiple loans.-- , (July 31, 2000)

(3) Multiple loans. For purposes of section 72(p)(2) and this section, a loan to a participant or beneficiary shall be treated as a deemed

distribution if two or more loans have previously been made from the plan to the participant or beneficiary during the year. This limitation

applies on the basis of a calendar year unless the plan applies this limit on the basis of the plan year or another consistent 12-month period.

PROP-REG, PEN-RUL ¶20,249, IRS proposed regulations: Plan loans: Qualified plans: Refinancing: Multiple loans.-- , (July 31, 2000)

Example 3. (i) A participant with a vested account balance that exceeds $100,000 borrows $20,000 from a plan on January 1, 2005 to be repaid

in 20 quarterly installments of $1,245 each. On March 31, 2005, when the first installment is due, the participant receives a second loan equal to

$1,245, with that March loan to be repaid in 20 quarterly installments of $78 each. On June 30, 2005, when the second installment is due on the

January loan and the first installment is due on the March loan, the participant receives a third loan equal to $1,323 (which is the sum of the

$1,245 installment and the $78 installment then due), with that June loan to be repaid in 20 quarterly installments of $82 each. On September 30,

2005, when the third installment is due on the January loan, the second installment is due on the March loan, and the first installment is due on

the June loan, the participant receives a fourth loan equal to $1,405 (which is the sum of the $1,245 installment, the $78 installment and the $82

installment then due), with that September loan to be repaid in 20 quarterly installments of $88 each. On December 31, 2005, when the fourth

installment is due on the January loan, the third installment is due on the March loan, the second installment is due on the June loan, and the

first installment is due on the September loan, the participant receives a fifth loan equal to $1,493 (which is the sum of the $1,245 installment, the

$78 installment, the $82 installment, and the $88 installment then due), with that December loan to be repaid in 20 quarterly installments of $93

each.

(ii) Under paragraph (a)(3) of this Q&A-20, the participant has deemed distributions on June 30, 2005 equal to $1,323 (which is the amount of

the June loan), on September 30, 2005 equal to $1,405 (which is the amount of the September loan), and on December 31, 2005 equal to $1,493

(which is the amount of the December loan) because on each of these dates the participant had previously received two loans from the plan

during the year.

[Mike Preston]

No, I think I misread the OP's comment to mean that if a second loan is taken there is a deemed distribution. Not only is it clear that the deemed distribution only takes place if the loan is the third loan, the regs themselves are just proposed. So I guess a case could be made for not even treating a third loan as resulting in taxable income until the proposed regs are finalized.