Can a loan be issued for more than 50% of account balance?

[BG5150]

It says in the EOB that no more than 50% of the vested account balance can be used to secure a participant loan.

If other security is obtained, could there be a participant loan that exceeds 50% of the vested account balance and not be considered a prohibited transaction?

(And, in any case, no more than $50,000)

[Belgarath]

Yes, but only for loans of up to $10,000.

[Guest Sieve]

I disagree with Belgarath. Other security can be used (besides 50% of the account balance) without a prohibited transaction occurring as a direct consequence. There may be a taxable event under IRC Section 72(p) if the loan exceeds 50% of the account balance, but not a PT. This assumes, of course, that the plan allows such security to be used and permits a loan to be given which exceeds 50% of the vested account balance. (See DOL Reg. Section 2550.408b-1(f).

[Belgarath]

As well you should! I absolutely agree with Sieve.

I was making an unwarranted assumption that they didn't want to incur a taxable event - a Pavlovian response based upon the actual situations that I always deal with. I've never actually seen a situation such as Sieve posits (and our documents don't permit it) but that's no excuse for my incomplete response.

[jpod]

Does DOL consider an enforceable payroll deduction authorization sufficient "other security" for purposes of the 408(b)(1) regulation? If not, do DOL and IRS look the other way when they see loans up to 10k that are in excess of 50% of account balance? I seriously doubt that any plans are asking for collateral on loans greater than 50%.

[Guest Sieve]

Bel - A Pavlovian response or not, you're an awfully harsh critic . . .

jpod - I can't believe that a payroll deduction authorization is considered adequate security, since "adequate security" is defined as

"something in addition to and supporting a promise to pay, which is so pledged to the plan that it may be sold, foreclosed upon, or otherwise disposed of upon default [and] the value and liquidity of which . . . is such that it may reasonably be anticipated that loss of principal or interest will not result from the loan." (DOL Reg. Section 2550.408b-1(f)(1).)

A payroll deduction cannot be "foreclosed upon or otherwise disposed of . . ."There are very few plans allowing de minimus $10,000 laons in light of the DOL security regs. But, I suspect that the DOL ignores its own rule in those instances. Anyone have any direct expereicne with that issue?