Can a repayment of a bank loan be classified as a residential loan in

[John A]

Can a participant take the following loan over more than 5 years as a residential loan?

The participant had a residential loan in a prior plan of an unrelated employer. The participant borrowed money from a bank to repay the prior plan loan so that he could roll the money into the plan of his current employer. The participant would now like to take a loan from the plan of his current employer in order to repay the bank, and would like to classify the loan as a residential loan. Can he take the loan from the plan of his current employer as a residential loan if he used it to repay the bank?

[Guest GregSelf]

Dumb question time:

Why didn't he just transfer the loan to the new plan in addition to his rollover? Sure would have been easier. (I know...that doesn't answer your question. Sorry.)

[Michael Devault]

I would think that the new loan would not qualify as a residential loan because it is not being used to acquire the participant's residence. Section 72(p)(2)(B)(ii) states that the exception to the 5 year rule applies "to any loan used to acquire any dwelling unit which within a reasonable time limit is to be used (determined at the time the loan is made) as the principal residence of the participant."

Since the dwelling unit has already been acquired, I don't see how the loan could qualify for this exception.

What does the plan administrator have to say about this issue?

[M R Bernardin]

Look at Q&A-8 of the proposed (now finalized) loan regulations under 1.72(p)-1, where it says that "a loan from a qualified employer plan used to repay a loan from a third party will qualify as a principal residence loan if the plan loan qualifies as a principal residence plan loan without regard to the loan from the third party." This doesn't exactly fit your situation, since in the example given it appears the participant (1) first applies for the loan to purchase the house, (2) then borrows money from a bank to purchase the house, and (3) then uses the proceeds from the plan loan to repay the bank. The intro to the Q&A states that "refinance" loans generally do not qualify and, in this case, I think that is essentially what you've got. Seems somewhat inequitable, though.

[John A]

Thanks for the responses. To describe the situation one more time (with a litte added detail):

The participant had a residential loan in a prior plan of a different employer. The current employer plan evidently does not accept rollovers of plan loans. The participant borrowed money from a bank to repay the prior plan so that the current plan would accept a rollover. The participant then did the rollover from the prior plan to the current plan. The participant would now like to take a loan from the current plan in order to repay the bank, and would like to take it as a residential loan, essentially reestablishing what he had in place at the prior plan.

Does the additional detail change anyone's opinion?