Prior loan used in determining accouint balance for additional loan.

[Guest Lawrence_Groves]

A participant wants to know the regulation that determines the definition of account balance for use in determining the account balance available for a loan. Participnat has $26,000 in money market investments and $13,000 in an outstanding loan. Participant believes that the account balance available for determiing a new loan is $39,000. Any comments?

[FundeK]

I would agree with the participant. You need to take her entire balance into account when determining her loan limits. You would take $39,000 * 50% = $19,500. She can have $19,500 in loans outstanding. Since she already has a balance of $13,000 outstanding, you must subtract the $13,000 from the available $19,500. If she wants to take another loan, it can not exceed $6,500.

Here is a section from the ERISA Outline book. Hope it helps.

Chapter 7: Taxation Rules - Section IX (Participant loans):

Part B.2. (Limits on amount of loans - outstanding balance of all loans considered)

© Copyright 2002 TRI Pension Services

7.168

2. Outstanding balance of all loans considered to determine if limits are exceeded. If a plan makes a loan to a participant when a prior loan balance is still outstanding, the amount of the new loan plus the balance on the existing loan must be aggregated to determine whether the limit is exceeded. See the first sentence of IRC §72(p)(2)(A).

2.a. Example. Minnie's vested account balance is $30,000. She has requested a loan in the amount of $3,000. Minnie has a prior loan with an outstanding balance of $13,000. The plan permits a participant to request a loan even though a prior loan is still outstanding. Minnie's nontaxable loan limit under §72(p)(2) is 50% x $30,000, or $15,000. If Minnie borrows an additional $3,000, she will exceed the limit because the total outstanding loan balance will be $16,000, when the amount of the new loan is added to the outstanding balance of the prior loan.

Vested balance includes prior loan. Note that for purposes of determining Minnie™s loan limit her vested account balance of $30,000 includes the amount attributable to the outstanding loan of $13,000.