401(k) loan collateral

[JAS]

A participant is permitted to borrow up to 50% or $50,000 of their account for a loan. 50% of the account is used a loan collateral. Should the 50% loan collateral be maintained at all times? Example: A participant has an account balance of $10,000 and takes out a $5,000 loan. The $5,000 left is the loan collateral. Can the participant then immediately take a hardship for $3,000 or should they wait until they either pay down the loan or make additional contributions to give them additional funds over the collateral amount?

[hr for me]

No, think of it this way---If there is a large drop in the market after taking a loan, their remaining balance might drop below the 50% level, especially if they stop deferrals and are only making small loan payments. Do you make them put in more to make up for that difference? No.

And many plans require the participant take out any available loan funds before granting a hardship. So it is my understanding that the 50% does not have to be maintained.

[Mike Preston]

Many? How about 100% of qualified plans that wish to remain so........

[rcline46]

The 50% left is NOT collateral for the loan.

[My 2 cents]

The 50% left is NOT collateral for the loan.

If there is a default on the repayments, the balance is treated as a distribution (with the associated taxes having to be paid from whatever other assets the participant may have). No need for "collateral" on a 401(k) loan.

The limit of 50% is not to leave enough money behind to match the loan. It is just there to serve as a limit to how much can be borrowed. The account is supposed to be for retirement security purposes.

[chc93]

Also, isn't the 50% requirement only at the time the loan is taken, and not for the life of the loan.

[My 2 cents]

Also, isn't the 50% requirement only at the time the loan is taken, and not for the life of the loan.

I don't work on 401(k)s, but I think the limit is only applied when the loan is taken.

[Tom Poje]

the concept 'on the date the loan was made' is from the Code.

Code Section 72(p)(2)(A)
does not exceed the lesser of—

(i) $50,000, reduced by the excess (if any) of—

(I) the highest outstanding balance of loans from the plan during the 1-year period ending on the day before the date on which such loan was made, over

(II) the outstanding balance of loans from the plan on the date on which such loan was made, or
(ii) the greater of

(I) one-half of the present value of the nonforfeitable accrued benefit of the employee under the plan, or

(II) $10,000.

now, lets suppose that rule didn't apply.

so last week the person took a loan. Friday June 24 the stock market dropped 546 points so no longer at 1/2 the amount, so you start ineligible loan procedures. but Tues and Wed the market has gone up over 500 points so now he has over 1/2 so now it is ok. so do you say the loan was bad or good or when would you say it ineligible because it is too much?