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In-Service Distribution with an Outstanding Loan

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I'm getting push back from an employer who doesn't want to allow an in-service distribution for a participant with an outstanding loan, since the distribution will make it so the loan is more than 50% of the current account balance.

Is there anything in the regs that would allow it?  I know there isn't an issue, I just need something to show the client.

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Keep in mind that in-service withdrawals, including hardship withdrawals, are not required to be permitted in the plan document.  You are going to have to look at the plan provisions to see what is or is not permissible for this employer's plan.  Most likely, you will not find a restriction in the plan that in-service withdrawals are not available to participants with outstanding loans.

Until recently, the hardship withdrawal rules required a participant to take a loan before taking a hardship withdrawal (assuming loans were available under the plan and the taking of the loan itself was not causing additional hardship).  While no directly relevant to this situation, it does illustrate that taking an in-service type withdrawal while having a loan was and is permissible.

The amount of a loan @Bill Presson notes is based on vested amount in the participant's accounts available at the time the loan is taken.  There is a strategy with taking a loan first and then taking an in-service withdrawal.  It maximizes the amount available when the loan is taken and the loan is a not distributable event, does not incur potential early withdrawal penalties, and does allow for the opportunity to repay the loan.  The amount of the subsequent in-service withdrawal was less and hence the adverse consequences of an in-service withdrawal were less.


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