Determination of loan amount with market fluctuation

[jsample]

When processing new loan requests for daily valued plans, I'm curious how others are determining the maximum amount available.  Assume a brand new loan, no previous loans.  If a participant requests a $5,000 loan with a $10,000 balance, but the account is valued at $9,750 at time of processing, do you process the original $5,000 request or adjust the 50% to the new balance?  The delay in processing may be due to receiving paper forms or else waiting for an employer signature or if there is missing information with an online request.

Per the ERISA Outline Book;

4.d. 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%).

This isn't an issue with our balance forward plans.  We use prior valuation plus contributions minus withdrawals, no earnings adjustment.

[Larry Starr]

2 hours ago, jsample said:

When processing new loan requests for daily valued plans, I'm curious how others are determining the maximum amount available.  Assume a brand new loan, no previous loans.  If a participant requests a $5,000 loan with a $10,000 balance, but the account is valued at $9,750 at time of processing, do you process the original $5,000 request or adjust the 50% to the new balance?  The delay in processing may be due to receiving paper forms or else waiting for an employer signature or if there is missing information with an online request.

Per the ERISA Outline Book;

4.d. 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%).

This isn't an issue with our balance forward plans.  We use prior valuation plus contributions minus withdrawals, no earnings adjustment.

Are you asking if the EOB answer is correct? Well, it is.  For daily valued, I would check the value on the day of the signing of the loan documents and apply the 50% max to that value.  And that's what EOB suggests as well.

[Patricia Neal Jensen]

Larry Starr is correct (of course!).  Use the date the loan documents were signed, etc.

PNJ

[Larry Starr]

20 minutes ago, Patricia Neal Jensen said:

Larry Starr is correct (of course!).  Use the date the loan documents were signed, etc.

PNJ

Blush!

[jsample]

Thank you.  I greatly appreciate the time you take to read and respond.