Loans given based on deferral money only

[Guest John Sample]

Can an employer allow loans from only employee funded accounts if there are other money types in the plan? For example, if an employee has an $80,000 balance; $20,000 in deferrals and $60,000 in profit sharing, the employer wants to limit the loan request to $10,000 (50% of the deferral account balance only).

I know that you can establish a heiarchy of money types for loans, (deferral money first, rollover next, vested match third, etc.) but I don't think that you can ignore the total vested account balance and other money types.

Also couldn't you have a potential discrimination problem if loans were available to HCE's on a greater basis than to NHCE's. In the most extreme example say that only HCE's defer in a safe harbor plan. Loans would only be avaialble to HCE's. You are also requiring that employees defer in order to get a loan.

Does anyone administer any plans with a loan policy that restricts participant loans to one money type?

Thank you.

[Guest Kevin Plymyer]

Yes, we have some plans that use the Colorado Pension Lawyers Association Defined Contribution Basic Plan and Trust. In the adoption agreement under section 7.6 Participant loans, it allows you to limit the loans to salary deferrals, matching contributions, other employer contributions or amounts rolled in or transferred to the plan.

When I read the document it states "To the extent loans are made available, such loans shall be available to all Participants or beneficiaries on a reasonably equivalent and non-discriminatory basis." I think it is a reasonably equivalent basis.

Of course, it is important that your adoption agreement indicates which sources should be excluded from the loan calculation.

I hope this helps!