Plan loan and Hardship withdrawal

 A participant meets all the requirements for a hardship withdrawal and the plan allows hardship withdrawals in the amount of the participants elective deferral account. However, there is an outstanding loan on the participants account and the hardship withdrawal will wipe out the amount in the account securing half of the loan. The plan does not have a provision prohibiting hardship withdrawals given outstanding loans but my conclusion  is to deny the hardship withdrawal given loan security issues unless the participant can prove the loan is secured by other than plan assets. Any comments. 

The 50% of the balance amount for a loan is only relevant when the loan is issued. After that, the participant still has access to all the rights in the plan.

Bill is 100% correct of course - however this is such a common misconception that I must comment too. 

What would you do if the market goes way down and the participant no longer has 50% of the loan amount that was security?

They can certainly take the hardship if the plan allows and they meet the criteria.

And while I concede the law has the 50% requirement the whole requirement is senseless in almost all plans.

As long as the loan is just a sub-account of the person's total account and not a general asset in a pooled plan (in all my decades of doing balance forward PSP and 4k plans I saw this maybe 3-5 times)  the loan is self securing.  

If the person defaults you don't take the person's other assets to "pay" the loan.  You simply write the loan off and 1099-R the person.

Simple example:

A has $10k in plan.  A takes $5k loan.  So account now has $5k in cash investment and $5k in loan balance.  The next day (I know it can't happen this fast) A defaults on the loan.  It isn't like take the $5k in cash assets to pay the loan off leaving the person with a $0 balance.  You simply say their balance is $5k which is what the cash investments are worth. 

The idea you need to secure a plan loan is just plain silly unless you have a balance froward pooled plan where the loans are part of the general investments. 

19 hours ago, ESOP Guy said:

You simply say their balance is $5k which is what the cash investments are worth. 

Unless it's a deemed default.  $5k for some purposes and still $10k for other purposes.  I hate deemed defaults.

Moderator edit 10/19/22: deleted advertising

The difference here being the lender (the Plan) generally has no risk since as the loan is fully secured by the participant balance in most cases which can be distributed/defaulted/offset as taxable income to the Participant with no loss real financial loss to the Plan.

Oh, how difficult it is to understand finance and all these banking schemes. I really understand why you're confused. I just recently started trying to figure out lending because I want to take out a loan for my daughter's education. I just recently moved to the USA with my family and everything here is very difficult and very different from Europe where I lived before. I was talking to a guy from navibanker.com and he advised me to take out a loan for a long time in order to have the lowest interest. What do you think about this? I decided not to litter the forum with new threads, but to ask right here, besides, I wonder what you came to in the end.