401k Loan for Primary Residence. Settled a month ago

[401king]

Client applies for a residential loan August 1, 2023. Paperwork supporting the purchase is not provided until today. The settlement date was August 7, 2023. Would you allow this to be a residential loan? Clearly the funds are not being used to acquire the home since the purchase has already settled. 

[Peter Gulia]

Does the plan’s administrator have a written claims procedure?

29 C.F.R. § 2560.503-1(b) https://www.ecfr.gov/current/title-29/part-2560/section-2560.503-1#p-2560.503-1(b).

If so, what does that procedure provide about whether a claim for a principal-residence loan requires evidence beyond the participant’s statements on the claim form?

If the written procedure grants the administrator discretion about whether to require or excuse supporting evidence, what has the administrator done regarding similarly situated claimants?

If the claims procedure calls for evidence beyond the claimant’s statement that the participant loan is used to buy the participant’s principal residence, consider these points from the Treasury department’s rule:

“The tracing rules established under section 163(h)(3)(B) apply in determining whether a loan is treated as for the acquisition of a principal residence in order to qualify as a principal residence plan loan.” 26 C.F.R. § 1.72(p)-1/Q&A-7 https://www.ecfr.gov/current/title-26/chapter-I/subchapter-A/part-1/subject-group-ECFR807fc2326e73cb3/section-1.72(p)-1.

I.R.C. (26 U.S.C.) § 163(h)(3)(B)(i): “The term ‘acquisition indebtedness’ means any indebtedness which— (I) is incurred in acquiring, constructing, or substantially improving any qualified residence of the taxpayer, and (II) is secured by such residence.

Such term also includes any indebtedness secured by such residence resulting from the refinancing of indebtedness meeting the requirements of the preceding sentence (or this sentence); but only to the extent the amount of the indebtedness resulting from such refinancing does not exceed the amount of the refinanced indebtedness.” http://uscode.house.gov/view.xhtml?req=(title:26%20section:163%20edition:prelim)%20OR%20(granuleid:USC-prelim-title26-section163)&f=treesort&edition=prelim&num=0&jumpTo=true.

And back to the § 72(p) rule:

“[A] loan from a qualified employer plan used to repay a loan from a third party will qualify as a principal residence plan loan if the plan loan qualifies as a principal residence plan loan without regard to the loan from the third party.

(b)   Example.  The following example illustrates the rules in paragraph (a) of this Q&A–8 and is based upon the assumptions described in the introductory text of this section:

Example.

(i)    On July 1, 2003, a participant requests a $50,000 plan loan to be repaid in level monthly installments over 15 years. On August 1, 2003, the participant acquires a principal residence and pays a portion of the purchase price with a $50,000 bank loan. On September 1, 2003, the plan loans $50,000 to the participant, which the participant uses to pay the bank loan.

(ii)   Because the plan loan satisfies the requirements to qualify as a principal residence plan loan (taking into account the tracing rules of section 163(h)(3)(B)), the plan loan qualifies for the exception in section 72(p)(2)(B)(ii).

26 C.F.R. § 1.72(p)-1/Q&A-8 https://www.ecfr.gov/current/title-26/chapter-I/subchapter-A/part-1/subject-group-ECFR807fc2326e73cb3/section-1.72(p)-1.

[fmsinc]

Assuming that you have a right to look behind the factual basis for his loan request, check out "bridge loan".  This is a loan that a borrower may take to enable him to close the transaction prior to the time he gets permanent financing or in this case a 401(k) loan.