Loan Limit

[jpod]

At what point in time do you apply the 50% limit in a daily valued plan? My inclination (based on the DOL reg. and the effect of Section 72p) is that you apply 50% against the vested account balance as of the date the loan proceeds are distributed (rather than, for example, on the date the participant completes the loan application process)? Anyone agree or disagree? If you agree, is that the way loans are typically administered in a daily valuation environment? Is there any specific IRS or DOL authority on this issue which I may have overlooked?

[ACox]

At what point in time do you apply the 50% limit in a daily valued plan? My inclination (based on the DOL reg. and the effect of Section 72p) is that you apply 50% against the vested account balance as of the date the loan proceeds are distributed (rather than, for example, on the date the participant completes the loan application process)? Anyone agree or disagree? If you agree, is that the way loans are typically administered in a daily valuation environment? Is there any specific IRS or DOL authority on this issue which I may have overlooked?

You will get answers all over the board. The way I typically see loans handled, is the 50% limit is calculated on the date that the loan is requested by the participant.

[Belgarath]

In the "real world" in the small plan market particularly, I'm guessing that the common approach is that maximum loan values are quoted when the loan application is signed/delivered to the Plan Administrator, and is not re-checked when the loan disbursement actually takes place.

I think that to be safe, you should use the most recent values as you have suggested. It would be nice if the IRS/DOL issued some reasonable "safe harbor" on this - the only guidance I recall for the IRS was way back in the, let's see... 1980's. I don't have the citation handy, just some notes.

[K2retire]

I believe that our system will reject any request that is more than 50% of the actual value on the date the check is processed. So in a down market, it would be limited to 50% of the balance on the date of distribution. In an up market, the participant might get less than 50%.

[pmacduff]

so - just out of curiosity - do you all redo the loan forms to reflect what was actuallly disbursed? We are in the small plan market and do the calculation on the day the loan is requested and forms prepared. We have had vendors refuse to disburse the amount requested (after the market tanks, for example). I know it's not an exact science and as ACox mentioned you get answers "all over the board" but I'm wondering what's done if the loan paperwork doesn't agree with the loan check...

[jpod]

The DOL regulation providing the PT exemption for plan loans says that in order to satisfy the adequate security requirement, you can't consider more than 50% of the vested account balance as security. The reg goes on to say that you make this determination immediately after the "origination" of each loan. Doesn't "origination" mean disbursement of the loan proceeds? Under 72(p), the loan is a taxable distribution to the extent it exceeds "one-half of the [vested account balance]." Given that 72(p) creates an exception for what would otherwise be a taxable distribution, shouldn't the measurement date be the date of distribution of the loan proceeds?

[Guest Sieve]

My response to jpod is "yes" and "yes". The consequences for each violation, of course, are different (income inclusion vs. prohibited transaction if additional security is not given). I think, however, it's all based on the last valuation prior to the loan origination (i.e., there's more certainty in a non-daily valued PS).

Of course, there is no inclusion in income if the loan does not exceed the $10,000 de minimus amount of IRC Section 72(p)(2)(A)(ii) (whether or not it's included in the plan document).

[jpod]

But, has not most or all of the industry ignored the 10K floor in view of the 50% limit in the PT exemption? Has DOL said that 50% of vested account balance plus payroll deduction = adequate security where loan amount (i.e., $10k) is greater than 50% of account balance? I don't think it's ever said that.

[Guest Sieve]

Yes, jpod, you're right: payroll deduction is not sufficient security if loan amount exceeds 50%--some other security would have to be given. So, as you say, for that reason plans virtually never include the $10,000 de minimus language because a plan does not want to mess around taking other security.

If, however, a plan does not include the $10,000 de minimus loan language but it still turns out that a loan exceeds 50% of the vested account balance (e.g., due to market downturns), then there is a PT--and a fiduciary breach for violation of plan terms--but there ought not be any includability in the participant's income if the loan amount does not exceed the $10,000 de minimus amount (since IRC Section 72(p) and the regs do not require that the loan meet the PT exemption in order to be excludable from income--see Treas. Reg. Section 1.72(p)-1, Q&A-3).

[jpod]

Agreed, but so what? It's a PT. Just to be clear, I am looking at a before-the-fact situation, not an after-the-fact situation. If the dirty deed had been done, I suppose we could take some comfort in the fact that there would be no 72(p) violation, even though there was a pt. But we are not inclined to intentionally enter into a pt.

[Guest Sieve]

Gee willikers, jpod, I've agreed with all you've said in your posts on this topic--except that I took exception to your post #6 statement that IRC Section 72(p) would include in income any loan amount over 50% of the vested account balance. On the PT side, I'm on your side.

Go pick on those who think there is no reason to limit the loan to 50% as of the date the loan is actually made (rather than when it is applied for) . . .

[jpod]

Sorry, Sieve; no offense intended, but now I see how my "so what" comment could have been misconstrued. I was only trying to make it clear to the Board that I am looking at the situation before the loan is approved, rather than after-the-fact.

[Guest Sieve]

No offense taken, jpod . . .