Can a participant with a deemed loan take a new loan?

[lradimer]

The 401(k) plan permits 3 loans at a time. A participant took a loan previously which was then deemed. If the participant has enough assets to take another loan, can he since the plan permits 3 loans? Does the deemed loan need to be repaid first? Thank you in advance for your advice!!

[K2retire]

What does the plan's loan policy say?

[Lou S.]

Assuming the loan policy allows it and they can actually take a new loan under the loan limits of 72(p) (remember the deemed loan including accrued interest is still owed and counts against the limits) then yes they can take a new loan. The loan policy should spell out whether or not they also need to restart payments on the deemed loan.

If it was me and I had say so I would draft the loan policy such that participants who have a deemed loan are not eligible to take a new loan until the deemed loan is either paid off or offset under a distributable event but hey that's just me.

[QDROphile]

A loan should not be made if the fiduciary does not have a reasonable expectation that the loan will be repaid. First, it should be unusual for a loan to go into default if the particpant is still employed by the sponsor, so I would be looking for an explanation about what went wrong (like a bad loan program design, including no concept that a fiduciary is responsible for determining if the loan should be made or not haveing adequate security - and I am not referring to adequate account balance). Second, given the first default that has not yet been covered, what is the expectation of repayment of a secon loan?

[NJ Mike]

Also check out Treas. Reg. 1.72(p)-1 Q & A 19(b)(2)