Maximum Loan Amount

[emmetttrudy]

A participant takes a loan in December 2010 for $5,000. They pay back the loan the same month. In February of 2011 they take another loan for $15,000, and pay it back 2 days later. It is now March 2011 and they would like to take the maximum loan available. The regulations say that you subtract the highest outstanding loan balance in the last 12 months. This would be $15k, meaning a loan should be available for $50k minus $15k, or $35k. The plan's vendor is saying all outstanding loans are subtracted in the prior 12 months, meaning you subtract the $5k and $15k from the $50k max and her maximum available is $30k. What is your understanding of the regulations? And are there any examples in the regulations that would support the loan being $35k.

[ETA Consulting LLC]

You vendor is not correct. A literal interpretation of the 72(p) rules (as illogical as it may sound) is that you subtract only the highest outstanding loan balance during the previous 12 months. You do NOT have to add any initiated loans during the previous 12 months to the highest outstanding loan balance. You should verify with the plan's written loan policy (without language specifically increasing the outstanding loan balance by newly initiated loans during the previous 12 months), then the loan availability should be $35,000; provided that the 50% rule is not exceeded.

Good Luck!

[emmetttrudy]

Thank you. I agree. Do you have any specific examples you have seen either in the regulations or commented on by the IRS? This seems to be one of those issues where some people interpret it differently and there is no clear guidance.

[Tom Poje]

The ERISA Outline Book notes that there are no specific examples for cases with more than 2 loans involved. (thus, I don't know where you would find an example that says "Yes, do it this way")

The book provides the 'literal' example along the lines as indicated above, but adds that without further guidance this is a 'reasonable' interpretation of the rules.

as a result, I'm not sure I would say one opinion is correct or incorrect, one is certainly conservative and you know it doesn't violate the rules. my gut feeling is the IRS probably wouldn't push the other interpretation since that is a literal reading of what it says.

[Guest cbclark]

We must have the same vendor as Emmett.

Participant had loan of roughly $21k, total vested account balance is roughly $58k. S/he wanted to borrow some more (plan allows 2 loans). Website showed s/he could get about $8k. S/he repaid the first loan because s/he didn't want to have two loans. Website now says roughly $4k available.

This doesn't make sense...if participant had taken two loans, could have had a total of $29k. After paying off the loan the website is adjusting the $50,000 cap and lowering the amount available. ERISA outline book (2010 version, p. 7.292) has some information about lowering the $50,000 cap on repayment of a prior loan, but the example has an original loan of (ta da) $50,000. That would make sense, but does it make sense to adjust the dollar limit cap when the dollar limit has not been reached?

My brain cramped...any ideas what we are missing? Thanks in advance!

[Lou S.]

We must have the same vendor as Emmett.

Participant had loan of roughly $21k, total vested account balance is roughly $58k. S/he wanted to borrow some more (plan allows 2 loans). Website showed s/he could get about $8k. S/he repaid the first loan because s/he didn't want to have two loans. Website now says roughly $4k available.

This doesn't make sense...if participant had taken two loans, could have had a total of $29k. After paying off the loan the website is adjusting the $50,000 cap and lowering the amount available. ERISA outline book (2010 version, p. 7.292) has some information about lowering the $50,000 cap on repayment of a prior loan, but the example has an original loan of (ta da) $50,000. That would make sense, but does it make sense to adjust the dollar limit cap when the dollar limit has not been reached?

My brain cramped...any ideas what we are missing? Thanks in advance!

Is the $21K current balance? Because there is a 12 month look back for highest outstanding balance. Just a thought that 12 months ago the $21K balance might have been $26K.

I'd call the vendor and ask them to explain the difference. They could be correct, I have seen some strange results with paid off loans, but it's possible there is a bug in their limit calulations.

[Guest cbclark]

Thanks. I will double check the original amount, although I am guessing the loan has been in existence for a while so I will need to get the highest unpaid balance looking back 12 months.

And I will get someone to ask the vendor....this particular vendor has had issues with "making assumptions" about areas that have some level of discretion in plan operation and making its assumption the default. Could be here as well.