Participant Loan Refinance

[Guest deathbycashcall]

Plan does not limit the number of outstanding loans, but recordkeeper limits them to 3. Vested balance exceeds $100,000 so the $50,000 limit is the maximum loan amount. Highest outstanding principal balance in the last 12 months was $43,000, thus $7,000 is available to the participant.

One of the loans must be "refinanced" to accommodate the limitations of the recordkeeper's system. The last loan that was taken out was in September 2010, for $4,000 with a maturity date of September, 2015 (maximum 5 year term).

Question: If the original term of the replaced loan is maintained with the replacement loan, can $7,000 be added to the existing loan without violating the loan refinancing rules?

I say yes; colleague says no. We're both reading Page 7.305 (option #2) of Sal's Book (2010 version) and arriving at two very different conclusions!

[david rigby]

Plan does not limit the number of outstanding loans, but recordkeeper limits them to 3.

First problem?

[masteff]

Don't have Sal's book so I can't try to guess what terminology is tripping your coworker up, but you are correct. The preable to the regs explicitly states: "A refinancing can also satisfy the repayment requirements of section 72(p)(2)(B) and © if the refinanced loan is repaid within the original term remaining on the prior loan." http://www.irs.gov/pub/irs-irbs/irb02-51.pdf

Edit: guess I should ask... what part of this scenario is your coworker saying violates the rules?

[Guest Sieve]

If you mean that the sum of the highest balances within the last 12 months of all loans is $43,000, then I agree with masteff's answer: if the term of the refinanced loan does not extend beyond the due date of the loan it replaces, then you can refinance a loan and add $7,000 new money to it. (The issue regarding highest 12-month balance is addressed in IRC Section 72(p)(2)(A)(i), and the refinanced loan repayment date issue is addressed in Treas. Reg. Section 72(p)-1, Q&A-20(a)(2).)

[Guest deathbycashcall]

Thanks!

My co-worker is saying that the new loan is $11,000, not $7,000, reasoning that $4,000 plus $7,000 for a total of $11,000 exceeds the $7,000 available limit ($50,000 - $43,000).

[Guest Sieve]

Except that the $4,000 is a preexisting loan, and it is being refinanced with $7,000 new dollars being added to it. The refinanced old amount is not somehow considered a new amount--it is already considered in the amount of outstanding loans at the time of the refinance, and is not added in a second time (as long as the term of the loan being replaced is not extended beyond its 5-year maximum without using 2 different amoritization schedules).

So, your co-worker would be correct if the new refinanced loan extends beyond the 5-year maximum of the loan it is replacing, in which case both the replaced loan of $4,000 and the new loan of $11,000 would be considered outstanding loans at the refinance date (unless separate amortization schedules are used for the old amount and the new amount). (See the reg cited in my earlier post.)

[QDROphile]

What about the first problem identified by david rigby? Does the participant have the right to a loan that is not limited to the due date of a prior loan? We all know the answer is found in plan terms, but the original post suggests that the plan terms do not restrict the loan.

[Guest Sieve]

Are there loan procedures which limit the number of loans? Many (most?) plans don't delineate loan provisions in the document, but incorporate loan procedures by reference and the loan details (such as maximum number of loans) are in the procedures.