$10,000 loan minimum

[Guest DavidB]

Pursuant to IRC 72(p) the maximum loan amount for a participant with no prior loans is the lesser of 1. $50,000 or the greater of 2. 50% of their vested balance/benefit or $10,000. So, if a participant has an account balance of $500, they can take a loan for up to $10,000????

If so, what are consequences if loan is defaulted??

Thanks.

[QDROphile]

I assume you are serious in asking this question. You will not find the situation in real life. The loan would be made only if the plan were designed to allow participant loans from a pooled investment fund as one of the investments of the fund (where else would you get funds in excess of the participant's account?) If the loan defaulted, the pooled fund would experience an investment loss. It would be the same as if the pooled fund had invested in a bond that defaulted. Don't forget the adequate security requirement for participant loans. A pooled fund loan should require security beyond an assignment of the participant's pay if the fiduciries are doing a reasonble job.

The practical meaning of the statute is that a $17,000 account could support a loan of $10,000 rather than $8500. You won't find many plans designed that way, either. Most go with the 50% limit.

[bzorc]

In the extreme, the participant would have to come up with $9,500 worth of collateral in addition to his or her account balance. I actually saw this occur once, with the collateral being a baby grand piano, with a value far in excess of the amount being loaned. Thankfully, the loan was repaid...