2nd loan requirements

[Beccyboo]

Hi there everyone, 

I’m hoping someone can help me with a query I have on taking loans from your 401k

in our plan you can have 2 loans at any one time and the plan rerefences to 2 standard IRS rules as applicable (up to 50% of vested balance or 50k less the excess between highest o/s loan balances and current o/s loan balance) 

I currently have 2 loans and want to pay one of them off and then take out another one, when I check what the estimated amount is I can take as new  loan it seems wrong so wanted to check if it’s correct or not.

here are some apt figures

Total vested balance =  $78,150

loan 1 current o/s balance = $14,300

loan 2 current o/s balance = $11,700

the highest o/s balance over the past 12months was $32,670

i want to pay back loan 2

the estimated amount is gives me is $17,340 available as a new loan. It give me this amount if I say that I would pay off loan 1 or both loans too. Is that correct?

it seems that it’s just reducing the 50k by the highest loan balance not the difference o/s balance and new current o/s balance once I pay one back. 

Any help or guidance would be greatly appreciated, I call the benefits centre who mange our plan and they can’t answer my query they just sound confused. 

[ATPA]

When there are 2 loans involved, the calculation is not entirely clear.  So providers use a  reasonable interpretation of the rules and allow the total principal lent in a 12 month period to be $50k, taking into account all loans taken in the previous 12 months.  That is why the amount is the same regardless of which loan is repaid.    

[ratherbereading]

This is why loans are a nightmare and shouldn't be offered in a plan!

[Tom Poje]

the following memorandum from the IRS might help. there is an example (highlighted) of a situation in which there were 2 loans.1 was paid off then a 2nd taken and that was paid off.

even the IRS concluded there were 2 ways of looking at what was the maximum loan available for taking a new loan.

loans max.pdf

[D Lewis]

I'm not sure the OP is saying the 2 loans weren't outstanding at that same time which is what the IRS example highlighted is talking about.

The maximum loan is the lesser of 50% of the vested account balance (minus outstanding loans), or $50,000 reduced by the highest outstanding loan balance in the last 12 months.

It's not 100% clear if the $78,150 above is inclusive of the loan balances - I'm assuming it's not.  (if it is, it's still the same answer anyway).

Therefore if the OP pays off loan #2:

50% of the vested account balance reduced by the remaining loan #1 is $37,775  - $104,150 X 50% minus $14,300.  (if the $78k includes the loans, the amount here is $24,775).

$50,000 minus the highest outstanding loan balance in the last 12 months is $17,330.

Maximum new loan is $17,330.

With these facts, it would be the same regardless of which loan was paid off or if both loans are paid off.

 

[401king]

4 hours ago, CEW said:

This is why loans are a nightmare and shouldn't be offered in a plan!

The only part that makes it a "nightmare" is explaining the rules to participants who simply want their money. Still, easier than explaining to a business owner that because he has a lot of money in the Plan he can no longer save. 

[Mike Preston]

If you want to see an excel implementation of an IRS example calculation, download the file below and use columns L and M to compare results.

http://docs.wixstatic.com/ugd/fa3ca5_ec07f19859c940098c4be9cbdf18f0dd.xls?dn=Loan Maximum Calculator.xls

[Larry Starr]

All of us pension wonks get off on showing how we know how to do the calculations, and we clearly understand these ridiculously complicated rules.

HOWEVER, the question posed by the original poster is how much he can take out as a new loan:

"I currently have 2 loans and want to pay one of them off and then take out another one, when I check what the estimated amount is I can take as new  loan it seems wrong so wanted to check if it’s correct or not".

No one has given him the correct answer, because that answer is: whatever the plan administrator tells you you can take".  The participant can do all the mathematical gyrations he wants, but if the plan gives him a number, right or "wrong", that's the number. QED.

[Mike Preston]

But in this case we have a typo by the OP ($17,340 should have been $17,330) and each of us, in our own gentle way, is saying that the OP is getting correct information from the "benefits centre". We are all trying to give enough information to the OP so that he/she can feel more confident with the information being provided.

[Pam Shoup]

$50,000, minus the highest outstanding loan balance of $32,670 is $17,330.  It doesn't matter if you pay off either or both loans, you still have to do the highest balance calculation.  For Example, if you took a $50,000 loan six months ago and paid it off last month, you would have zero available for a loan today since you had $50,000 as your highest outstanding balance during the last 12 months.

[Beccyboo]

Thanks everyone for your comments I really appreciate all the responses. 

[ratherbereading]

On ‎5‎/‎18‎/‎2018 at 11:09 AM, 401king said:

The only part that makes it a "nightmare" is explaining the rules to participants who simply want their money. Still, easier than explaining to a business owner that because he has a lot of money in the Plan he can no longer save. 

What actually makes them nightmares is multiple loans and clients who make incorrect payments or no payments. I encourage my clients not to include loans.  People need to manage their finances!