Loan Fee and 50% Loan Limit

[Gadgetfreak]

Daily val 401k Plan. Participant has a vested balance of $2,093. Plan's loan policy has a $1,000 minimum loan amount. There is a loan set-up fee of $100. Can loan be processed?

If we say that, at the time of loan request, there was over $2k, then the answer would be yes. On the other hand, we KNOW that the loan will trigger a $100 fee which would mean there was less than 50% in the account. I know that subsequent distributions (and losses) have no bearing on the loan amounts. But, in this case, we know right away that the fee will bring down the amount used as security. What does everyone think? I couldn't find anything on these boards or in the EOB. Thanks.

[ETA Consulting LLC]

Up to the plan's loan procedures. Typically, the loan fee is deducted from the loan amount. If you take a $1000 loan, you'd receive a check for $900. The plan could charge the participant's account with a fee, where a $1000 loan would generate a check for $1000 and an account fee of $100.

To say that there is a minimum of $1000 but you must borrow $1100 in order to pay the $100 loan fee and receive a minimum check for $1000 is reading too much into it

Good Luck!

[Gadgetfreak]

Thanks for the reply. We typically charge the fee to the account but not as part of the loan. So, if someone wanted a $1,000 loan, they would get a check for $1,000 (and need to pay back based on a $1,000 loan) but an additional $100 would be assessed as a fee (not part of the loan). This is based on the Loan Policy from the Accudraft EGTRRA Docs:

LOAN AMOUNT

● Maximum Permissible Loan. In general, the maximum amount that can be borrowed is the lesser of 50% of a Participant's

Vested Interest or $50,000. If the applicant has any existing loans, the $50,000 amount will be reduced by the excess (if any)

of his or her highest outstanding aggregate loan balance during the 1-year period ending the day before this loan is made,

over his or her outstanding aggregate loan balance on the day this loan is made.

● Minimum Allowable Loan. Loans that are less than $1,000 will not be granted.

PROCESSING AND MAINTENANCE FEES

● Processing Fees. The applicant will be charged a fee of $175 to process each loan application.

● Maintenance Fees. There are no annual maintenance fees on loans.

● Source of Fees. Fees the applicant does not pay directly will be deducted from his or her Account.

LOANS MUST BE SECURED

Each loan must be secured, including a loan for a residential mortgage (as described below in the section Loan Payments),

with an irrevocable pledge and assignment of the applicant's Vested Interest. The applicant can also post any other security or

substitute collateral the Administrator finds acceptable.

So, do you think I can process the loan now for $1,046 and THEN assess the $100 fee? Or, knowing that there will be a $100 fee immediately which will bring the remaining balanced to less than 50% of the loan fee, means that I should NOT process the loan?

[ETA Consulting LLC]

So, do you think I can process the loan now for $1,046 and THEN assess the $100 fee? Or, knowing that there will be a $100 fee immediately which will bring the remaining balanced to less than 50% of the loan fee, means that I should NOT process the loan?

Yes. I think that is perfectly fine. I cannot begin to imagine that being challenged.

Good Luck!

[StormShadow]

Based on what you have posted, "the maximum amount that can be borrowed is the lesser of 50% of a Particiapnt's Vested Interest or $50,000...", it does not say Vested Interest after Loan Fee so my feeling is that the loan is allowable. If there is no loan, the Participant's Vested Interest is $2,093 and 50% is $1,046.

However, I would check past plan procedures to see what has been done in these situations (for example, if you KNOW there is a big loss on the day you are processing the loan, do you reflect that in the Vested Interest?). If this situation has never been an issue, I would ask the plan sponsor/administrator what they want the procedure to be (and get it in writing/email).

[WDIK]

Reduce the loan fee by $7 and stop stressing.

[Gadgetfreak]

Reduce the loan fee by $7 and stop stressing.

That would be discriminatory.

[BG5150]

Reduce the loan fee by $7 and stop stressing.

That would be discriminatory.

Only if it was lowered for an HCE.

[ETA Consulting LLC]

Reduce the loan fee by $7 and stop stressing.

That would be discriminatory.

Only if it was lowered for an HCE.

But it would be a failure to follow the written terms of the plan; 401(a)(1). The loan procedures are likely a part of the Plan's terms by reference in the Plan's document. Without an expressed exception to reducing the fee from $100 to $93 would constitute discretion in the plan's operation

[Bill Presson]

Thanks for the reply. We typically charge the fee to the account but not as part of the loan. So, if someone wanted a $1,000 loan, they would get a check for $1,000 (and need to pay back based on a $1,000 loan) but an additional $100 would be assessed as a fee (not part of the loan). This is based on the Loan Policy from the Accudraft EGTRRA Docs:

LOAN AMOUNT

● Maximum Permissible Loan. In general, the maximum amount that can be borrowed is the lesser of 50% of a Participant's

Vested Interest or $50,000. If the applicant has any existing loans, the $50,000 amount will be reduced by the excess (if any)

of his or her highest outstanding aggregate loan balance during the 1-year period ending the day before this loan is made,

over his or her outstanding aggregate loan balance on the day this loan is made.

● Minimum Allowable Loan. Loans that are less than $1,000 will not be granted.

PROCESSING AND MAINTENANCE FEES

● Processing Fees. The applicant will be charged a fee of $175 to process each loan application.

● Maintenance Fees. There are no annual maintenance fees on loans.

● Source of Fees. Fees the applicant does not pay directly will be deducted from his or her Account.

LOANS MUST BE SECURED

Each loan must be secured, including a loan for a residential mortgage (as described below in the section Loan Payments),

with an irrevocable pledge and assignment of the applicant's Vested Interest. The applicant can also post any other security or

substitute collateral the Administrator finds acceptable.

So, do you think I can process the loan now for $1,046 and THEN assess the $100 fee? Or, knowing that there will be a $100 fee immediately which will bring the remaining balanced to less than 50% of the loan fee, means that I should NOT process the loan?

The loan policy says there is a $175 fee.

Also, can you just have the participant write you a check and not deduct it from his account?

[Gadgetfreak]

Oooooh. You caught me . The situation is 100% accurate but I made up the numbers to make it easier to understand. I was using a $100 loan fee just for illustration but GREAT catch!

Participant does not want to write a check. Don't ask me why but we offered.

In any event, it is still an interesting topic to discuss and, based on what I am reading here, I am comfortable saying that at the time of loan request, the balance is over $2,000 and therefore a $1,000 loan can be processed. If a fee brings the remaining balance to under $1,000, so be it. It would be similar to a loan taken on 12/29 and then quarterly fees hitting the account on 1/1. Or if investment losses cause a drop in account value the day after the loan.

Thank you all for your input. I REALLY appreciate it.