Plan Loan

[Madison71]

You have a plan the allows multiple loans with a maximum of 50,000 or 1/2 of the participant's vested benefit. Minimum loan of $1,000.

Participant has a total account balance of 10,000 (including a loan outstanding). Participant takes out a loan for $3,000 two years ago for 5 years. The outstanding balance left on the loan is $2,000. If the participant has a total account balance of $10,000 (which includes the $2,000 loan), how much can he take out in a loan? Is it $3,000 (1/2 of 10,000 minus the $2,000 loan already outstanding), or is it $2,000 (1/2 of $8,000 minus the $2,000 already outstanding?

Thank you for your help

[pmacduff]

We compute it as in your first example: (take the total vested balance of $10,000 times 1/2 = $5,000 then reduce by the current outstanding loan balance of $2,000 leaves $3,000 left for a new loan.)

I've heard the argument that the current outstanding loan balance has no vesting per se, so you would start with the $8,000 but we consider the current loan as part of the vested account balance.

sorry I wasn't much help, huh?

[Madison71]

Thank you for getting back to me. I agree with the approach you laid out. Anyone agree or disagree?

[Mike Preston]

Other than reading the regulations, which are pretty detailed, I seem to recall that there is a 1 year lookback for balance outstanding. Was that removed?

[Sully]

Typically, the 1 year lookback applies to the $50,000 limit, although it could apply in this case. You will need to read the Loan Program to confirm the limits for your particular plan.

Also, be careful if you are considering a 'replacement loan'. Their limits are a little more involved and may limit how much can be borrowed.

[austin3515]

"or is it $2,000 (1/2 of $8,000 minus the $2,000 already outstanding?"

After this loan, the participant will have a total account of $10,000, and loans of $4,000. Therefore, he/she will have just 40% of their account in loans, while the max is 50%.

"Is it $3,000 (1/2 of 10,000 minus the $2,000 loan already outstanding), "

After this loan, the participant will have a total account of $10,000, and loans of $5,000. Therefore, the participant obtains the maximum of 50%.

And so, you see, the second formula is the correct formula.

[Madison71]

Great. I was just making sure that you include the previous loan in the total account balance...b/c it says "1/2 of vested account balance" I just wanted to make sure the previous loan was included when computing 1/2. Thank you.

"or is it $2,000 (1/2 of $8,000 minus the $2,000 already outstanding?"

After this loan, the participant will have a total account of $10,000, and loans of $4,000. Therefore, he/she will have just 40% of their account in loans, while the max is 50%.

"Is it $3,000 (1/2 of 10,000 minus the $2,000 loan already outstanding), "

After this loan, the participant will have a total account of $10,000, and loans of $5,000. Therefore, the participant obtains the maximum of 50%.

And so, you see, the second formula is the correct formula.

[austin3515]

Remember, a loan is just another investment, and so would be included in the vested account balance.

[Guest Kevin1]

This participant could have a total loan of up to $10,000 but would have to provide additional security over the 50% of account balance figure. (I don't think you want to go there.)

[pmacduff]

Kevin1 - not neccesarily - only under certain loan policies - they would need to check their particular plan's provisions.

99% of our client's loan policies no longer have that language regarding the max of $10,000 and outside collateral.

Do others still see that loan language around a lot?

[austin3515]

Heard of it, but never seen it...

[Belgarath]

We used to have it, but got rid of it! Too much confusion.