Maximum loan after loan default

[bcmom]

When calculating the maximum permitted loan after a loan is defaulted, I can't remember if I should add the current value of the defaulted loan (like I would a active loan) to the investment balance before applying 50%? Example: Ptp defaulted on loan in 2015 and has no other loan. The defaulted loan value after adjusting for interest through today is $2000. His vested investment balance today is $20,000. Is his maximum available loan:

A. $9000 =  [($20,000 + $2000) *50%] = $11,000 - $2000

or

B. $8000 = ($20000 * 50%) = $10,000 - $2000

 

[Lou S.]

A

But why would a plan give another loan to someone who has defaulted already? You'd think that would be prohibited in the loan policy or they borrower would be deemed not credit worthy by the Plan.

[MoJo]

17 hours ago, Lou S. said:

A

But why would a plan give another loan to someone who has defaulted already? You'd think that would be prohibited in the loan policy or they borrower would be deemed not credit worthy by the Plan.

Lou:  I agree it would be "prudent" practice to include language in a loan policy that precludes another loan when a defaulted one exists, but I can tell you from experience that even if such a prohibition exists, many recordkeeping systems can't track that.  Essentially, if a plan allows 2 loans but prohibits another loan when one is in default, some rk systems will look and see that only one loan exists and issue a second one when the first was in default.

So while I agree with you, I think it is worse if the loan policy contains the prohibition and it's not enforced - and I'm working right now on correcting that situation....

[NJ Mike]

Agree with what has been said.  I think all the plans we administer that have loans allow a new loan even if there was a defaulted loan.

Just make sure the new loan satisfies the additional condition that it must be either repaid through payroll deduction or the plan receives adequate security. 

See Treasury Regulation 1.72(p), Q & A 19(b)(2).

Mike

[401_noob]

I listened to a Relius webinar yesterday ("401(k) Beyond the Basics 14: Participant Loans: The Fine Print") and the presenter said that any new loans following a loan that has been deemed distributed is a deemed distribution unless the old loan is repaid and the Plan receive adequate additional collateral from the participant or loan payments are via mandatory payroll deduction.

This was news to me. I had never heard the part about paying off the old loan before. I am familiar with Treasury Regulation 1.72(p), Q & A 19, but i didn't see anything that mentioned paying off the old defaulted loan.

Has anyone heard this before?

 

 

401(k) BB 14 Loan Fine Print.docx

[Doghouse]

Do those conditions have an "and" or an "or" between them? An "or" makes sense.

[401_noob]

The way it was explained in the webinar and displayed on the attachment I provided, it seems like an "and".

[Bird]

If you have 3 items separated by commas and the second one has "or" then it is implicit that all are meant to be "or" - i.e. the text would read like this:

Quote

 

...any new loans following a loan that has been deemed distributed is a deemed distribution unless

• the old loan is repaid, OR*
• the Plan receive adequate additional collateral from the participant or
• loan payments are via mandatory payroll deduction.

 

*There was nothing in the source document, you had "AND" but I put "OR" in to clarify.

Having gone through all that, I don't know of authority for that position. 

[401_noob]

well I guess that would explain why I can't find this in the EOB.

Thanks for the clarification!!