Loan in excess of 50% of account balance

[Guest esi-jht]

Here are the facts: Participant's account balance is $1800.00. Participant wants a loan in amount of $1000.00. It is my understanding that the loan amount can be up to $1800.00 but the COLLATERAL for the loan cannot exceed 50% of the account balance. If this is correct and the participant wants to put up additional collateral, how is this handled?

[E as in ERISA]

The IRS limit is the greater of 50% or $10,000. The DOL rule says that there must be "adequate security" for the loan (but no more than 50% of the balance can be used for that purpose). However, if you use other collateral for security, the trustee should be prepared to take enforcement steps against such collateral in the event of default. So plans rules will often just use a 50% loan limit. A plan amendment could be necessary if they want to change that. Are they willing to incur $$$ to create the additional documentation for the collateral, possibly amend the plan, and then later possibly take enforcement action?

[Guest Pensions in Paradise]

In addition to what E said, the trustees could be breaching their fiduciary duty if they accept additional collateral. So the bottom line is there is no good reason to grant a loan to a participant for more than 50% of their vested account balance.