Loan requirements/in-service distribution

[Guest Peggy806]

A participant has a vested balance of 10,000, of which 2000 is his loan balance. He is allowed to take in-service distributions from all accounts in the plan. Can he take 8000 (all of the cash) or does he have to keep 2000 in the plan in order to keep his 2000 loan? I was thinking that the loan requirements were only relevant when the participant takes his loan out and that he can take all of the cash remaining now. He will continue making payments on the loan. Is this correct?

[mming]

Unless the plan document specifies otherwise, I would play it safe and distribute no more than $6,000 so that the loan balance is no more than 50% of the remaining vested amount. I see many documents that invoke the 2-year accumualtion rule for in-service distributions - this may support limiting the amount of the distribution if the plan has this provision.

[ACox]

Unless the document states otherwise, you should be okay to distribute the full amount of the participant's account.

I have always used the 50% rule on the day that the loan is requested. If a participant has a 10K balance and requests a 5K loan, that would be acceptable under the 50% of vested account balance rule. What would be done if a week later the market tanks and now the remaining 5K in the plan is only worth 4K? The participant would not be required to pay a lump sum to bring the plan balance back into alignment with the 50% rule, nor would they be issued a 1099 for any default loan amount.

[Guest Sara H]

I Agree with ACox - an employee can request a loan and then take a hardship distribution of up to the maximum available for hardship without regard to the amount of money left in the plan. It is my understanding that the 50% rule is to just determine the amount of loan available, but not the amount of money that must remain in the account after the loan has been taken. Of course, if the plan doc says different, than that rules.

[Guest Sieve]

The DOL requirement is that "adequate security" for a loan requires that no more than 50% of a participant's account balance can be considered as security for thAt participant's loan(s), and the 50% is determined "immediately after origination of each partcipant loan secured in whole or IN part by the participant's vested accrued benefit." (DOL Reg. Section 2550.408b-1(f)(2)(ii).)

So, you have to be careful about what happens after a 50% loan is requested and before the check is cut.