Maximum Loan amount and subsequent distribution

[Guest Statler]

I have a plan under IRS audit where the agent is saying 72(p)(2)(A) was violated and we need to deem part of a loan.

The participant had a vested account balance of $103,000 in 2003 (all numbers are greatly rounded) when he took out a $50,000 principal residance loan. In 2007 his outstanding loan balance was $40,000, his vested account balance was $120,000 (including loan) when he took out a distribution for $64,000. The agent is arguing that $12,000 of the loan balance is a deemed distribution since the maximum loan amount under 72(p)(2)(A) would be $28,000.

I thought that the maximum loan amount was only determined at the time a loan was taken and was not affected by any subsequent distributions provided that the vested account balance was not less than the outstanding loan balance. Is this in fact true? Does anybody have any good cites to go back to the agent with?

[Mike Preston]

"Please confirm with your manager the loan treatment you are proposing."