Loan limits - 50% of account balance as of what date

[Trekker]

Our client has a plan that is valued annually. Participant applies for a loan February 2008. The 12/31/07 valuation is not yet complete. Using the 12/31/06 balance, the amount requested would not exceed 50% of the 12/31/06 balance.

However, the plan is expected to suffer a loss, so when the 12/31/07 valuation is completed, the amount requested may exceed 50% of the 12/31/07.

If the loan is processed today and the 12/31/07 valuation eventually shows a loss to the extent the loan exceeds 50% of the 12/31/07 balance, is this loan out of compliance?

[J Simmons]

I would think the most recent valuation (12/31/2006) would do. However, since the plan officials now expect a dip in the value of the participant's account, it might be a fiducary breach to do so based on the 12/31/2006 values.

Also, if the security for the loan is a pledge of 1/2 of the total vested accrued benefit, the dip in value might render the loan to be less than fully secured when the 12/31/2007 valuation comes out. So even if you can get past the 50% limitation issue for amount of loan, fiduciary prudence might require some additional security for this loan.

[mschwechter]

You do not mention if it is a 410(k) or a PS Plan, but in either case, have you taken into account deferrals or potential ER allocation, that might be in excess of the expected loss?

If the anticipated loss can be offset by the contributions, may be OK.

Also need to look at the potential increase in vesting, unless already 100% vested.

[Trekker]

Actually, it is an ESOP. Participant is fully-vested. Not sure if Employer contribution would cover expected decrease in account balance, but that is a good thought we will pursue.