Any way to undo a participant loan?

[Dennis Povloski]

A participant in a plan was working on a land deal, and he needed money fast to make a down payment. He took a participant loan of $50,000. One week later, the land deal fell through, so he doesn't need the $50,000 after all.

If he repays the loan early, it is my understanding that he will not be able to take another participant loan in the next 12 months because his highest outstanding balance was $50,000.

Is there any way for him to undo the loan so that he can put the money back without having the 12 month restriction? or is he just better off keeping the funds and making loan payments so that he has some cash available in the event that another deal pops up?

[12AX7]

Did the participant sign a loan agreement and other paperwork to initiate the loan? Did the participant take constructive receipt of the funds (deposit to an account outside of the plan)? Was an amortization schedule and other information delivered to the participant? Under all these circumstances, the participant has a loan, right? I don't see how you can "undo" a loan that has occurred. The fact that he doesn't need the money presently would not change the rules.

That's the way I see it if this was my client. Might be best to repay for now according to schedule as you suggest.

[ETA Consulting LLC]

I agree with 12AX7. If the participant is eligible for a distribution he can repay the loan, and then perform a direct rollover of cash into an IRA. This would give him a subsequent ability to take a 60 day loan (distribution and rollover within 60 days) from the IRA. Just a thought.

Good Luck!

[BG5150]

On paying back the loan:

If he pays back the entire amount now, he is locked out of a loan for a year, but will have the full $50,000 available then. However, if he repays it according to the schedule, in TWO years from now, his loan availability will only be about $10,000 (he'll have $40,000 outstanding a year from now).

Just something to consider.

[K2retire]

On paying back the loan:

If he pays back the entire amount now, he is locked out of a loan for a year, but will have the full $50,000 available then. However, if he repays it according to the schedule, in TWO years from now, his loan availability will only be about $10,000 (he'll have $40,000 outstanding a year from now).

Just something to consider.

But he'll also still have the $40,000 that he hasn't paid back (at least theoretically).