Question 240: Bill participates in a plan sponsored by X Inc. and a plan sponsored by Y Inc. X and Y are in a controlled group. He has a $20,000 vested benefit in the X plan and $30,000 in the Y plan. He just borrwed $5,000 from the X plan and wants to know how much he can borrow from the Y plan. Does the fact that X and Y are a controlled group affect things?
Answer: Yes, very much so. The two corporations are considered a single business for purposes of the 72(p) loan rules. (See Who's the Employer, 3rd edition, Q 10:22.)
So we must aggregate X's plan and Y's plan to determine if the loan limit is violated. The total vested benefit is $50,000, so the loan limit is $25,000. Bill already has $5,000 outstanding, so he can borrow another $20,000 from either plan without violating the 72(p) loan limit.
Having said that, the lending plan would have to make sure that the loan is adequately secured, and might require security other than the participant's account to secure the loan. Bill cannot, for example, use his interest in the Y plan to secure a loan from the X plan. Under DOL regulations, only one half of a participant's vested benefit can be deemed to be security for a loan. Suppose Bill decides to borrow the $20,000 from plan Y. Bill could pledge his interest in the Y plan as security for the loan, but that interest could secure only $15,000. Bill would need to come up with additional security to satisfy the DOL's prohibited transaction exemption requirements.
I will be discussing participant loans in light of the newly finalized IRS regulations (which open the door for credit card loans), on two webcasts sponsored by SunGard Corbel on Wednesday, December 18. Click here for more information.