Can a participant who has reached retirement age take a plan loan, if

[Guest Tara Curran]

A participant who is age 66 wants to take out a plan loan to purchase a new house. He will sell his existing house and wants to use the proceeds to pay off the plan loan. Is this type of accelerated payment allowed by the IRS or DOL?

Also, is the distribution of the plan loan subject to the 10% early withdrawal penalty since the participant is over age 65? What if he dies before the loan is completely paid off, will his remaining balance offset the outstanding balance and his beneficiaries will not be subject to the 10% penalty on the defaulted loan?

[actuarysmith]

Unless the loan policy specifically states that loan repayments must come through payroll deduction I see no reason why a participant could not make payments "out of pocket". It is just not as convenient and requires the amort schedule to be revised.

[pjkoehler]

In order to avoid being treated as a taxable distribution, the loan documents must provide for substantially level amortization over the term of the loan. Code Sec. 72(p)(2)©. The loan may, however, provide a prepayment provision. Keep in mind that the loan must have adequate security. If the security is a portion of the employee's vested account balance, then he will not be able to take a distribution of that portion of the account until the loan is paid off, unless he chooses to default and receive a plan loan offset distribution.

If the employee needs a short-term bridge loan for less than 60 days, it might make more sense for him to elect a direct rollover to an IRA, take a withdrawal from the IRA and redeposit the funds within 60 days. This can be done once each calendar year with no tax consequences. This effectively the employee him an interest-free loan for 60 days, without the hassle of originating a new loan in the plan. Since he is over age 59 1/2 he is not subject to the 10% tax on premature distributions under Code Sec. 72(t).

If the plan the employee isn't retiring or terminating employment, check to see if the plan provides for a nonhardship in-service withdrawal upon attainment of age 59 1/2.