Principal Residence Loan #2

[Guest notapensiongeek]

I have a participant in a 401(k) PSP (earmarked accts) that took out a loan back in the 1990's to purchase his principal residence for him and his spouse. This loan is scheduled to be repaid in another ten or so years. He got a divorce a while back, his account was divided between him and his spouse, and now he would like to take out another loan to purchase his primary residence since his spouse got the other house. So, now he would have two primary residence loans at the same time (plan allows for 2 loans at a time). Is this ok or does this violate the tracing rules, or any other rules out there? I never do administration on participant loans and now I know why...what a nightmare they can turn into!!

Any input would be greatly appreciated ;-) Thanks!!

[Mike Preston]

I'm not aware of any rules being violated as long as the document doesn't preclude it. That is, the Code and the regulations don't seem to have a prohibition on multiple loans of this kind. However, the plan or the loan policy might have been drafted in such a way as to preclude this circumstance.

[Guest notapensiongeek]

Thanks for your response, Mike. The plan and loan policy don't address this, so it seems to be ok for now (I wasn't sure this passed the smell test, though...)

Now, what would happen, say, if the first house was sold to an unrelated party - could he continue to repay on the first loan or would he be required to pay it off? Again, this is not addressed in the plan or loan policy.

Just a curiosity question!

Thanks ;-)

[Mike Preston]

If he no longer has a security interest in the property then the loan should be repaid. <clears throat> The original loan WAS recorded, was it not? As long as the property stays in his name, the loan doesn't "go poof". But if the property is transferred, the loan must be paid off, just like any other secured loan. Right?

[QDROphile]

Repayment depends on the terms of the loan. Despite mandates, many plan loans do not have the same terms as their commercial counterparts.

[Mike Preston]

If a loan doesn't have a required provision, which you refer to as a mandate, doesn't the loan inch toward, if not race toward, losing the prohibited transaction exemption?

[QDROphile]

If "due on transfer" clauses or special security arrangements to meet adequate security requirements were necessary, I am sure your first response would have noted them. Most plans prefer not to have the real property secure the loan, even though commercial lenders do. Loan acceleration is usually a function of the security terms. I think section 72(p)(2)(B)(ii) of the tax code and section 1.72(p)-1 Q&A(6) are helpful, but a plan can be stricter.