Loan Question

[Deaconmomma]

When processing loans, if participant has already received approval to borrow 50% of their vested balance determined at the time they requested the loan. They have signed and returned the paperwork. Now with the market drop, do we need to recalculate the amount the participant could borrow. What if the paperwork has been sent to them, but they have not returned it.

[rcline46]

Can I borrow 50% of my balance as of July 1, 2008? 2009? 2012?

If you grant ANY slide, then how long? Best bet is 50% on day liquidation occurs.

[401king]

Isn't the loan determination date is the big factor? When you determine the vested balance, loan amount, payment amount, amortization schedule, promissory note, etc. I don't know how we could effectively administer loans in preparing a Note, knowing that the Note may need to change each day that the participant does not return it.

[jpod]

In daily valued plans, isn't the 50% limit typically applied based on the balance at the previous day's close? In other words, the participant may ask for a loan of 50% of his balance on Tuesday, but if liquidation occurs on Friday he can't get more than 50% of his account balance on Friday morning.

[BG5150]

In daily valued plans, isn't the 50% limit typically applied based on the balance at the previous day's close? In other words, the participant may ask for a loan of 50% of his balance on Tuesday, but if liquidation occurs on Friday he can't get more than 50% of his account balance on Friday morning.

So say I have $10,000 in my account on Tuesday. I apply for a $5,000 loan, and everything is signed and sent back that day. Due tot he 3-day processing window at the carrier, my loan isn't processed until Friday morning where the balance has dropped to $9,500. How could you process a loan for $4750? All my paperwork and schedule say $5,000.

[jpod]

How could you? I think you could and would in order to avoid a prohibited transaction.

[BG5150]

From the EOB:

Difficulties experienced by daily valued plans. Daily valued plans can experience significant swings in the value of a participant’s vested account balance between the time the loan process commences and the time the loan is disbursed from the plan. As a practical matter, how should the plan apply the 50% loan limit (or any lesser limit under the plan) in this context? IRS Notice 82-22 does not provide any guidance here, primarily because in 1982, when that notice was issued, daily valued plans weren’t on the radar screen. IRS Notice 82-22 does say however that “a valuation of the participant’s interest within the last twelve months may be used, provided it is the last valuation available.” Reasonable administrative procedures should be established to ensure that the most recent daily valuation possible is used. For example, the value in effect when the loan obligation becomes fixed (i.e., necessary signatures and consents are obtained) should be a reasonable approach in the absence of more formal guidance from the IRS. In addition, the employer should consider addressing the issue in the loan policy. An approach used by some employers is to set the plan’s loan limit at less than the statutory maximum (e.g., 40% or 45%).

See the bolded. I know it's not black letter law, but I would consider the loan obligation occurring at the time all the signatures (or computer authorizations) are finalized.