What am I forgetting? - Taking a second 401k participant loan

[Santo Gold]

This is too simple, but here goes:

Participant has a $50,000 vested 401k account balance.  They take a maximum loan of $25,000 and have no other loans at the time

A few days later, they realize they need more $$$ and wish to take a second loan (plan allows for this).

Lets say the account balance is static and in a few days, the vested account balance is now $25,000 (after the initial loan) and no loan repayments have been made yet.

Can the participant take a second loan for $12,500 (50% of $25,000)?

I'm sure the answer is "No", but the above makes sense in a weird way.

Any comments are appreciated.

[Marjorie Lucas]

Yes, a participant can generally take multiple 401(k) loans if allowed by the plan; however, care should be taken to ensure that all loans combined do not exceed IRS limits.

[Santo Gold]

The participant can take a second loan, but there is something wrong if in the above example, they are limited to $25,000 with one loan, but can get $37,500 with 2 loans (or more $$$ with > 2 loans). 

Is the maximum second loan calculation: [[50% * $25,000 (vested balance)] - $25,000 (current loan balance] = -$12,500.  Since this is less than $0, then no second loan is available?

 

[ESOP Guy]

Your math and logic is all wrong.  Read the IRS examples:

https://links.us1.defend.egress.com/Warning?crId=6984f4a2c933bcd338c721dd&Domain=oneblueridge.com&Threat=eNpzrShJLcpLzAEADmkDRA%3D%3D&Lang=en&Base64Url=eNrLKCkpKLbS1y9JTcwt1svNTC7KL85PK9FLzs_Vz01NLdE3MrE0s7AwMbe0tDA3M7IvsA21zEsvrfIrzM4M8CrLyvIMzQYALWcXFw%3D%3D&@OriginalLink=teams.microsoft.com

 

[Peter Gulia]

On Santo Gold’s hypo, isn’t the account balance after the first loan is made still $50,000—that is, $25,000 participant loan receivable + $25,000 other investments?

But wouldn’t ERISA § 408(b)(1) and Internal Revenue Code § 72(p)(2)(A) limit the amount for a second loan?

Consider 29 C.F.R. § 2550.408b-1(f)(2)(i) https://www.ecfr.gov/current/title-29/section-2550.408b-1.

Consider 26 C.F.R. § 1.72(p)-1/Q&A-20 https://www.ecfr.gov/current/title-26/section-1.72(p)-1.

Even before applying the tax Code limits, ERISA § 408(b)(1) limits the outstanding balance of all loans to the participant to more than half the participant’s vested account (measured after the origination of each loan).

On Santo Gold’s hypo, if the participant when applying for a second loan has not yet repaid anything on the first loan, isn’t the second loan $0?

[Peter Gulia]

Oops, no more than half . . . .  , or just half.

[Marjorie Lucas]

Your conclusion is correct.

You referenced:

• Vested balance = $25,000

• Existing loan = $25,000

50% vested balance limit

50% * $25,000 = $12,500

Maximum total loan amount allowed across all loans

$12,500 - $25,000 = ($12,500)

($12,500) is  less than 0.  Not eligible for any additional loans.

All loans cannot exceed the  Maximum statutory limit, which is the lesser of 50% of the vested account balance or $50,000

[Santo Gold]

Thank you all.

 

[ConnieStorer]

I would like to chime in.

Participants actual account balance is the sum of the actual assets in his account plus the value of the outstanding loan.

Assets remaining after the loan - $25,000

Outstanding loan - $25,000

His account balance is $50,000

50% of this is $25,000

Less outstanding loan of $25,000

Remaining loan available is $0

You need to remember to add back in the loan since it is part of his account value before you determine the 50% of vested balance.  Unless the asset value drops from the original time you took the loan, you should never get a negative answer.