Getting around the five-year rule for participant loans

[401(j)]

It occurs to me that one way around this, in a climate where interest rates have gone down, is for, a couple of years into the amortization schedule on an initial five-year loan, the participant to take out a second five-year loan (with lower monthly payments) to pay off the first loan. In effect, this turns that original five-year loan into a seven-year loan -- and I can't find anything to say this is improper.

Anyone aware of anything that would thwart this type of arrangement? Thanks in advance.

[401king]

If a plan allows for two loans there is no reason the participant couldn't take a second and use part of the proceeds to pay the first. Just so long as the 2nd loan amount complies with the limits.

FWIW - I've found people have had the high hopes of paying off the first loan in these arrangements, but tend to keep the funds.

[12AX7]

View the section regarding the refinancing of a loan:

www.irs.gov/pub/irs-tege/epche12a03.pdf‎

[ESOP Guy]

View the section regarding the refinancing of a loan:

www.irs.gov/pub/irs-tege/epche12a03.pdf‎

12AX7 is right- it is the refinancing rules that greatly cut down on that tactic. Back when I worked on 401(k)s more which was before those rules I had clients who had employees refi their loans every year. As far as I could tell the people were going to never pay the loan off until it became a distribution. But those refi rules ended that abuse.

[401king]

Isn't this not considered a refinance, though? Just a separate loan that the participant may or may not use to pay down a first loan.

[masteff]

See this recent thread: http://benefitslink.com/boards/index.php?/topic/53667-participant-loan-corrections-epcrs/

[ForksnKnives]

Even if you viewed that series of transactions as a "deemed refinancing" as discussed in that thread, I don't see how that would treat the two loans any differently than if the participant took the second loan out for any other purpose. It's up to the participant to take steps to pay off the first loan. The participant is still stuck with future loan availability affected by the simultaneous existence of both loans.