Participant loans

[Guest jim williams]

Am I correct when determining a participant's vested account balance with regards to applying the 50% limit that employer contributions (profit sharing, safe harbor) accrued as of the last day of the previous plan year but not yet deposited to the participants' self-directed accounts are included as part of the vested account balance at the time a loan is issued?

[Guest Sieve]

I would say No. "One-half of the present value of the nonforfeitable accrued benefit . . ." (IRC Section 72(p)(2)(A)(ii)). A receivable ought not be part of the present value--and, besides, a PS contribution is only discretionary. And, you may have a PT because you are using as security more than 1/2 of the account balance at the time the loan is taken.

[Tom Poje]

well now ain't that a fine kettle of fish. The ERSIA Outline Book (at least the 2006 edition) says increase by contributions (e.g. they use deferrals as an example) and decrease by distributions made after the val date. but that is the IRS rules. as Sieve indicated there are the prohibited transactions rules (the DOL)

for an interesting discussion see http://www.eerisa.com/articles_0109.html

[Guest Sieve]

Tom -- The IRS rule tries to update the last val date, but does not--I believe--take into account receivables (as the OP wanted to), but just contributions actually made. If given the choice, i think I'd fear the DOL first and foremost . . .

[Guest jim williams]

Thank you for your responses. So what we are saying is that there may be room for adjusting a participant's account balance under the IRS regs to avoid taxation but that the DOL regs are quite clear that to avoid a prohibited transaction a participant's account balance is determined as of the date of the loan regardless of accrued receivables. I would assume for IRS purposes, a safe harbor receivable would be considered as a nonforfeitable accrued benefit.

[Guest Sieve]

My personal belief is that receivables (including hard-wired contributions) do not count for IRS purposes, since you use the last val date plus contributions subsequently made and minus distributions subsequently made. Accrued benefit is defined in IRC Section 411(a)(7)(A)(ii) as "the balance of an employee's account"--and, although that's only a Section 411 definition, I see nothing that would change that for the 50% loan rule of IRC Section 72(p). But, yes, I guess it's open for interpretation.

And receivables for sure do not count for DOL purposes. But, you can get around that by using other/additional security.

[Guest WJW]

If, on the date the loan is made, the account has been valued on an accrual basis and the contribution has been accrued, but is still a receivable, why would that not be a countable asset in the account? I have clients who might even distribute discretionary plan account statements before the contribution is made, showing a contribution receivable as part of the 12/31 balance. From at least one view, the receivable is an asset of the plan.

Do the DOL regs address this specifically? (I haven't had time to check.)

[Bird]

I feel, pretty strongly, that you do count receivables. Every single one of my calendar year plans has a "valuation date" on Dec 31 (and many - probably most - have valuation dates every day of the year). And they all have language about contributions being allocated as of the last day of the year (the valuation date), and we always prepare our account summaries on an accrual basis. So as far as I'm concerned, an accrued contribution of any type is part of their account. Accounting 101 says an accrual is an asset.

I believe the reference in the IRS regs to adjustments after the val date is to reflect actual "new" contributions (most likely 401(k) deferrals), not the deposit of accrued contributions.

And I didn't see anything in the link about the DOL addressing accruals; I thought it was all about gains and losses and did not translate to accruals. (They're right by the way about the account value being determined on the day of the loan, not the day the docs are signed, but there's only so much you can do...)

My 2 cents.