Participant Loans and Involuntary Cash Out

[Randy Watson]

Are participant loans taken into account in calculating the value of a participant's benefit for purposes of the involunary cash out rules?

[g8r]

For whatever it's worth, I think the loan is taken into account (the note held by the plan is an asset).

[FundeK]

From the IRS & ABA Section of Taxation May Meeting 2004

§411(a)(11) – Participant Consent (Under $5,000 Force-Out)

A terminated participant in a §401(k) plan has a total account balance of $5,500, of which $2,500 is an outstanding loan. If the loan is deemed distributed prior to the date on which his benefit would be payable, is the participant’s account balance considered to be $5,500 or $3,000 for purposes for the $5,000 cash-out rule.

Proposed response: The participant’s account balance is $5,500 for this purpose because it includes his entire vested account balance.

IRS response: The IRS disagrees with the proposed answer. On the particular date, the participant’s benefit is $5,500, but if there was an offset for the loan, the remaining vested benefit could be cashed out. So if the loan offset occurs before the time for the cash out distribution, the participant can be cashed out.