Loan in default

[Earl]

I thought I remembered reading a requirement that stated if you have a loan in default you cannot get a new loan.

I sure can't find it now that the situation has arisen.

Anyone have any clues on this or am I imagining it?

Thank you

[K2retire]

It depends on the plan's loan policy provisions. I remember being taught that if a participant had defaulted on a loan then the plan administrator must take that into account in determining credit worthiness for a subsequent loan. Also, some plans limit the number of outstanding loans and the defaulted one counts toward that limit until repaid.

Corbel's EGTRRA prototype has specific choices in the loan policy that ask if the plan administrator must determine credit worthiness and if a participant may have another loan after a default. That implies that the answer to your question might be yes.

[Earl]

Good summary of policy guidelines, know any regulatory guidelines on the issue?

Thanks

[Tom Poje]

also, for purposes of determining how much loan is available, even though the defaulted is no longer considered for other purposes, the defaulted loan continues to accrue interest, so even if a plan allows more than one loan, the individual is 'penalized' so to speak

[Guest Sieve]

For some guidelines, see Treas. Reg. Sectino 1.72(p)-1, Q&A-19.

[Earl]

Thanks, so I guess there is no express prohibition and I was dreaming.

Appreciate it.

[Guest Sieve]

Well, Earl . . . maybe you weren't dreaming, but just smokin' . . . ???

Besides, as suggested by K2, there may be a plan prohibition.

[Earl]

Since we are talking about the owner, I am not really worried about what the plan says because I can change that in about 5 minutes.

But there are those pesky regulations that continue to harrass me.

Thanks again.

[K2retire]

Since we are talking about the owner, I am not really worried about what the plan says because I can change that in about 5 minutes.

But there are those pesky regulations that continue to harrass me.

Thanks again.

If it's an owner only plan, you're fine. If not, be careful that you change doesn't happen in a discriminatory manner. Has anyone else had a defaulted loan who could be impacted?

[QDROphile]

If the borrower is the owner, you have great sensitivity because loans that are not paid are essentially in-service distributions. Who is making the decision to make the loan? Is there an intent and capability to pay? If there is, why has not the first loan been paid? I think the situation is terribly sticky and just the sort of thing the IRS would jump on if it ever enforced anything.

[Earl]

If the borrower is the owner, you have great sensitivity because loans that are not paid are essentially in-service distributions. Who is making the decision to make the loan? Is there an intent and capability to pay? If there is, why has not the first loan been paid? I think the situation is terribly sticky and just the sort of thing the IRS would jump on if it ever enforced anything.

That sounds just like what I told him. Except I said dangerous instead of sticky.