50% Loan Requirement - Does It Matter After Loan Taken?

I;m having a disagreement with someone regarding this:

Once a loan is taken, obviously it can't be more than 50% of the vested balance (up to $50k).  

What happens once the loan is taken?  Does the 50% still stand?  If a participant with a loan then wants to take an in-service distribution (as allowed by the document), can they not take it if it brings the loan balance to be greater than 50% of the balance (i.e. if someone who is eligible opts to take 100% of their balance, leaving the only current asset as the loan balance)?

I've been told by a record keeper that the 50% rule no longer stands once the loan is taken, but I wanted to confirm.  Is there anything in the regs that I can cite, if I'm correct?

Thanks in advance!

Indeed, the loan 50% rule only applies when it's taken.  People have been doing the "Borrow half, hardship the rest" move for years....and that clearly leaves the loan as 100% of the remaining balance.

13 minutes ago, Bri said:

Indeed, the loan 50% rule only applies when it's taken.  People have been doing the "Borrow half, hardship the rest" move for years....and that clearly leaves the loan as 100% of the remaining balance.

Thank you!  Is there anything in the regs that I can reference?  I just want to be able to back it up to settle it.  Thanks!

Think of it this way.

If I have a $50,000 vested balance today and take a $25,000 loan, that leaves me with 50% of my account, $25,000.

What if next week the market dips and I'm left with $23,500?  My loan is now worth more than 50% of my account (including the loan, of course).

Would you see that as a problem?

There's no difference if the account goes down by value or distribution.

1.72(p)-1 and go from there maybe

It is my understanding that if you have a vested balance of $100,000 in your 401(k) and you borrow $50,000, then you still have a vested balance of $100,000 in your 401(k) but it is subject to a loan of $50,000.  The periodic statements I have seen reflect the foregoing.  

So that would leave the remaining $50,000 for a hardship distribution.  

26 CFR § 1.72(p)-1 - Loans treated as distributions at https://www.law.cornell.edu/cfr/text/26/1.72(p)-1 provides at Question 3:

"Q-3: What requirements must be satisfied in order for a loan to a participant or beneficiary from a qualified employer plan not to be a deemed distribution?

A-3: (a) In general. A loan to a participant or beneficiary from a qualified employer plan will not be a deemed distribution to the participant or beneficiary if the loan satisfies the repayment term requirement of section 72(p)(2)(B), the level amortization requirement of section 72(p)(2)(C), and the enforceable agreement requirement of paragraph (b) of this Q&A-3, but only to the extent the loan satisfies the amount limitations of section 72(p)(2)(A)."

 Logic compels the conclusion that the amount borrowed does not reduce the vested balance unless and until it is not repaid in which event it becomes a "distribution" that would reduce the vested balance. 

David