Max Loan Calculated and then the Market Drops

[CO Bank]

Our 401k auditors discovered what they believe is a violation that needs to be corrected. Below is a chronology:

May 10 2006: employee applies for the max available loan.

May 15 2006: TPA calculates this amount as $10,500.

May 23 2006: Due to market drop, participant’s balance is $20,728 – half of this is $10,364, which should be the maximum available loan. Custodian funds the loan for $10,500.

Auditor is questioning what we will do to rectify. Loan is still outstanding, current principal is about $7500.

Is this a violation? Hoping there might be a de minimus defense, or a defense that the amount was correct on the date of calculation.

If we need to correct, would we simply ask participant to pay back $136 and reamortize the loan?

Thank you!

[shERPA]

$136 over 7 years ago? Seriously? I don't see a problem here, there is always a certain "administratively feasible" time lag in dealing with these things.

I assume it is a principal residence loan since it is >5 years?

[CO Bank]

Yes, this was a home loan. I did hear from our TPA that the 50% rule is based on the date the loan calculation is made, not the date the loan is funded. I think the auditors will take their word for that.

Thanks for the response.