Security For Plan Loan

[chris]

What should plan do where participant took loan a while back and account balance used as security and now participant terminates employment when value of participant's account won't cover balance owing?

[Mike Preston]

What is the loan balance? What is the account balance (exclusive of the loan balance)? What is the total vested interest, counting the loan balance? Something tells me that you will just end up defaulting the loan if the participant doesn't pay it back, or rolling it to a new plan.

There is no need for the loan to be secured by anything other than the vested balance, in accordance with 72(p), at the time of the loan. After that, there is no particular requirement for the plan to maintain adequate security. I suppose it is possible that the interest on the loan before it is defaulted would exceed the remaining account balance, but lets just say I'm skeptical.

[chris]

Treating the loan as a participant directed investment at the outset (which a majority of our plan doc's do) would minimize any downside to the general trust, correct? Thus, the participant (and not the plan) is the one who loses all the way around, i.e., taxable distribution, low/no assets in account balance, etc...?

[Blinky the 3-eyed Fish]

Considering the loan balance is included in a participant's account balance, how is it mathematically possible for the loan balance to exceed the value of the participant's account. Even if the remaining 1/2 of the vested balance at the time of the loan went to zero, worse case is you are still left with the loan balance equaling the account balance.