Benefit Restrictions/Loan

[Guest Sus95]

I have a one person plan with an AFTAP of less than 60%. Can the participant take a loan from the plan, or is a participant loan considered a prohibited payment under Section 436?

Although a loan is not necessarily a distribution, it could become a "deemed" distribution if in default, so it would make sense to me that it should be prohibited. However, regs and code not specific on this matter, and I thought I heard at some prior webcast that loans should be prohibited.

Any input would be appreciated.

Thanks.

[Andy the Actuary]

At least at this time, your Plan does not deny loans so would have to be amended to disallow. Your point is so very well taken that loan default would be tantamount to plan disqualification so you probably should go into heavy cya mode to ensure the one-person (and spouse) understand the severity of default. Before granting a plan loan, the plan should consider the consequences if the the one-person croaks, because if you don't, he/she will.

[Kevin C]

I don't think a loan is a problem because if it is defaulted, the deemed distribution is not treated as an actual distribution under section 401. The section 436 restrictions are referenced in section 401(a)(29).

1.72(p)-1 Q-12: Is a deemed distribution under section 72(p) treated as an actual distribution for purposes of the qualification requirements of section 401, the distribution provisions of section 402, the distribution restrictions of section 401(k)(2)(B) or 403(b)(11), or the vesting requirements of §1.411(a)-7(d)(5) (which affects the application of a graded vesting schedule in cases involving a prior distribution)?

A-12: No; thus, for example, if a participant in a money purchase plan who is an active employee has a deemed distribution under section 72(p), the plan will not be considered to have made an in-service distribution to the participant in violation of the qualification requirements applicable to money purchase plans. Similarly, the deemed distribution is not eligible to be rolled over to an eligible retirement plan and is not considered an impermissible distribution of an amount attributable to elective contributions in a section 401(k) plan. See also §1.402©-2, Q&A-4(d) and §1.401(k)-1(d)(5)(iii).