Loan terms and documentation

     1.   I am stumped trying to determine whether a plan that contains this language would be permissible:   

The amount of the loan is limited to the lesser of $50,000 or 50% of the account value of a date when the loan is issued.  

This would seem to comply with 72(p) but I don't see many plans phrased this way.  Is it incorrect?

     2.  Also, most plan loan applications request dollar amounts and not percentages. Why is this?

Any help appreciated.  I went down the rabbit hole on this one!

That language is ignoring any prior loans in determining the maximum.  If I have a 100,000 account balance, I could borrow 50,000 and then borrow 50,000 immediately again since that's half the account balance.

As for why loans are done as dollar amounts, that's because the dollar amount needs to be certain in the actual promissory note and fixing that eliminates the need to update paperwork on the fly if the alternative 50% value fluctuates.  Plus I would borrow 8,000 if I knew I needed 8,000 - I wouldn't back into a request for 7.193% of my account balance.

First off, it's 50% of the vested account balance - that's an important distinction.

Second, as Bri points out, it's not correct in the event there are other loans. Even if the plan only allows a single loan at a time, the $50,000 limit is still reduced by the highest outstanding loan balance in the past year. If you wanted your language to apply, the plan would need to say that a participant may only have one outstanding loan at a time, and also that they may not take another loan until at least 1 year after the final repayment of the previous loan has been made.

The language in the plan document pertaining to the maximum amount of the loan generally follows the language in the Internal Revenue Code, except for the issues other people have identified.  But it is perfectly appropriate for the amount requested by the participant to be expressed in dollars and not in percentages--that happens almost all the time.  The participant usually wants a dollar amount for a specific purpose where the cost is known.  Some participants, if allowed by the plan, will request "the maximum available" if they are making a large purchase such as a house or paying tuition, and since the value of an account fluctuates, the amount of the loan would not be determined until it is actually processed.

I have never seen language regarding plan loan specifics in the plan document or Adoption Agreement itself.  The document has either a "yes" or "no" option regarding loans.  

It is in the separate Loan Procedures section of the SPD, or the separate Loan Procedures supplement that lays out the administrative procedures for loans.  The elected loan provisions "hold hands."  the loan limit is part of a broad selection of loan provisions.  Thus, the limits do not stand alone.

As for dollar vs. percent, we work primarily with investment platforms.  I doubt any of them would accept a percent election for the loan amount.  In fact, none that I have seen have an option for electing a percent.  You can't prepare an amortization schedule with a percent.

In a pooled arrangement, on the other hand, it's neither here nor there since the balance holds for a year.  Why would a participant elect a percent when they can calculate the available loan amount on their own?  If they can't do the math, they can have the TPA calculate the resulting dollar amount so an amortization schedule can be prepared.

The majority of plans use pre-approved plan documents and most of those pre-approved plan documents are structured with a pairing of an adoption agreement and a basic plan document.  You are correct to note that often the adoption agreement only asks whether loans are or are not permitted.  If they are permitted, then additional questions are gathered in a loan section of the AA or in a separate administrative procedures section or appendix of the AA. 

Take extra care is using the SPD as the sole source of documentation of the choices available.  Too often, the SPD leaves out details that come up operationally but infrequently.

Note that all of the optional loan provisions available that typically are authorized explicitly in the pre-approved document are in the basic plan document, and there are some provisions that are not optional that do not appear in the typical loan checklist.  For example, there can be an interplay between loans and spousal consent rules, or in the calculation of a spousal beneficiary's benefit.  

The request for a percentage is fairly common.  In a daily environment, most recordkeepers can accept the percentage election, update the account balances overnight, calculate the maximum loan amount available, apply the elected percentage, and generate the promissory note and amortization schedule.  As EPCRSGuru noted, this is a common request when a participant has upcoming a large expense.