How do you determine if a new loan is considered a “replacement loan”?

[MarZDoates]

How do you determine if a new loan is considered a “replacement loan”?

Here are the facts:

Plan allows one outstanding loan per participant. Maximum loan amount is the lesser of 50% of vested value or $50,000 (reduced by….so on)

Participant takes “loan number 1” in 2003 amortized over 5 years. Participant has enough cash and pays off the balance of loan number 1 in 2005. (Maximum allowable term ends in 2008)

Participant then takes out loan number 2 in 2005 amortized over five more years shortly after paying off loan number 1. (Maximum allowable term ends in 2010)

No problem as far as only having one loan at a time as far as the document is concerned. Loan is not for purchase of home. The amount is well under $50k.

So, is loan number 2 considered a replacement loan even though she paid off the other loan with her own funds?

I am trying to determine if we need to take both loans into consideration to calculate the maximum amount of the new loan (50% of vested value).

Thanks.

[E as in ERISA]

Look at the example in the refinancing regulation. Question 20. http://a257.g.akamaitech.net/7/257/2422/12...fr1.72(p)-1.htm

I think that the answer is that you have to decide whether you want to get around the amount rule or the 5-year rule. You can only take advantage of the special rule for amount on refinancing if you then make sure that the original amount is still amortized over the original five years. Can't use the full five years starting from the date of the new loan. If both the old and new fit within the amount limit, then you can go out a full five years on the total loan.

[Guest beccafaith]

Okay, I'm confused, please help me out here....

I didn't think Loan #2 was a refinancing!! I thought Loan #1 was paid off with personal funds first. Then the member came back at a later date and obtained a new Loan #2.

So, there is only one loan outstanding and there have been no refinancings!

What am I missing or failing to see?

[MarZDoates]

That was my original question. Upon further research, I now see that loan number 2 is not replacing loan number 1.

[E as in ERISA]

My point is that the regulations don't specifically require the second loan repay the first in order to be a "refinancing" or "replacement loan." You can use it when you need to take a second loan that will violate the amount limit if you reamortize correctly. Example. Participant has $100,000 in account. Buying a new car early 2005. Is anticipating a bonus sometime in February 2005. Borrows $25,000 from plan with intention of repaying with bonus. Repayment occurs. In January of 2005 partipant finds house of his (her) dreams. Wants to borrow $35,000. Can't do so because of amount limit. Don't refinancing rules allow it provided that at least part of loan is reamortized through February 2010 (five years from first loan)?

Provided plan allows this, of course.

[Guest beccafaith]

Okay E, so are you saying....

that because another loan is taken out within the same year one has been paid off, then it is viewed "automatically" as a refinancing or replacement?