Maximum loan limitations

[Guest MarkN]

Is it permisable to limit the maximum loan from a PSP to an amount less than 1/2 vested benefits (or $50,000)? I have a client that wants to limit the max. loan amount to the lesser of 50% of employee deferrals or $10,000. As long as I'm not tying the max loan amount to a percentage of compensation I don't see why this wouldn't be allowed but haven't found any regs to validate my thoughts. Any help would be appreciated.

[Belgarath]

This response is kind of "off the cuff" so be careful of giving it much credence! I think that limiting it to a maximum dollar amount should be fine. I can't see how this would violate the nondiscrimination regulations. However, if it is limited to a percentage of deferrals, I can see how this might be discriminatory, since the H/C may have a higher deferral percentage. You could take a look at the DOL Regs 2550.408(b)-1 which might be helpful in working through the question.

[Guest OscarD]

DOL regulation 2550.408b-1, preamble, states:

"Other commentators questioned whether minimum or maximum loan amounts, or required minimum account balances were permissible under this section....

None of these limitations and conditions necessarily contravene the conditions of section 408(b)(1) of the Act or the provisions of this regulation. Such limitations, however, would have to be examined to determine whether in practice (1) the limitation is the basis for loans being unreasonably withheld from any applicant, and (2) the loan program, through such limitation, excludes large numbers of plan participants from receiving loans under the program, thereby raising the issue of whether the program meets the requirement of section 408(b)(1)(B) of the Act and §2550.408b-1© of the regulation."

We've seen a handful of plans with a limit lower than the $50,000 (eg., $10K) as well as limiting the types of contributions from which the loan can be issued (e.g., employee deferrals only, and no loans from employer monies.) Have also seen cases where certain contribution types are considered for purposes of calculating the maximum amount available, but not for purposes of issuing the loan. Make sure that your plan document (or Loan Policy Document) accurately reflects this loan approval process.

Oscar

[WDIK]

I'm not sure if this logic holds, but if a plan does not allow participant loans, couldn't this be viewed as capping the maximum loan amount at zero?

[Guest yukon]

How can you put a limit on a provision that doesn't exist?

[WDIK]

The comment was not intended to say that a limit would be placed on a nonexisting provision, rather it was intended to present a possibile scenario where a plan limits the loan amount to something less than the statutory maximum.

FYI, this is not the first time that my perspective is perceived as peculiar.