403(b) Loan Limit

[Guest AFRICA6796]

PLEASE HELP !!

The rule states that a participant may not borrow more than 50 percent of the vested portion of his/her account balance in his or her 403(B) plan. The 50 percent limit will not be violated if the loan does not exceed the lesser of (1) $10,000 or (2) 100 percent of his or her vested account balance.

The 403(B) plan document states that the loan may be secured ONLY by the participant’s nonforfeitable account balance.

If the participant has a balance of $14,000, can he borrow $10,000?

I think not, because the remaining balance o $4,000 is not adequate security. Or is the promissory note considered the security?

HELP PLEASE!!!!!!!!!

[MWeddell]

First, let's assume that this 403(B) program is not an employer-sponsored plan subject to ERISA. For example, it is a church plan or it is a voluntary elective deferral only program.

Under that assumption, the answer to your question is yes. An employee with a $14,000 account balance may borrow $10,000. After the loan transaction, the account balance now holds a promissory note worth $10,000 and other assets worth $4,000. The portion of the account invested in the promissory note serves as collateral.

If the participant were somehow to immediately default on the loan and become eligible to take a distribution simultaneously (let's say by terminating employment for a loan that required one to remain actively employed), then the loan may be offset against the promissory note and the participant could then take a distribution of $4,000 but have income tax withholding based on a taxable distribution of $14,000.

[Guest AFRICA6796]

Thank you so much

[E as in ERISA]

For purposes of the 72(p) rules (which also have a 50% limit), are elective deferrals treated as amounts contributed by the employer (like they are for many purposes under 401 ff.)?

[MWeddell]

Katherine,

I don't recall that 72(p) distinguishes between employee and employer contributions, so I don't know what you're referring to. However, the Internal Revenue Code generally does classify elective deferrals as employer contributions.