Loan in excess of 50%

[Guest rgorman]

Only one loan allowed. Plan sponsor allowed participant to take more than 50% of his vested account balance. Loan was for $2,500 and done back in July 2004. The plan document and the loan policy do not have the $10,000 minimum langauge.

Based on my research, I believe the excess over the 50% of vested account balance is a deemed distribution at the time the loan was issued. It also appears that this would be a prohibited transaction since it would not meet the prohibited transaction exemption since the loan was not adequately secured.

Anyone know a way around this? Can I rely on the 10,000 miniumum under 72(p) even if it is not in the document or loan policy?

[WDIK]

Even if you took the position that the loan satisfied the requirements of 72(p) and therefore was not a deemed distribution, you still would have an operational failure that would need to be corrected under ECPRS.

I agree with your statement regarding the prohibited transaction exemption.

[Guest rgorman]

So, if I went with the 72(p) 10,000 minimum and had documentation on outside collateral for the loan, could I also avoid the prohibited transaction issue since it would be secured just not with 50% on the vested account balance?

I know I would still have issue of not operating in accordance with the loan policy/document.

[WDIK]

I do not think that what you suggest avoids a prohibited transaction. IRC Section 4975(d)(1)© provides for an exemption from the applicable tax only if the loan "is made in accordance with specific provisions regarding such loans set forth in the plan."