max plan loan reduction

participant has a 150,000 account balance in a 401(k) plan.  the plan allows one outstanding loan at a time.

lets assume the participant took out a 50,000 loan in 2015.  the current loan balance is 20,000 and the highest outstanding loan balance in the past 12-month period was 30,000.

the participant wants to repay the existing loan balance of 20,000 and take a new max loan.

is the new max loan (after the repayment of the existing loan) 20,000 or 40,000?

50,000 - (30,000 - 0) = 20,000 or

50,000 - (30,000 - 20,000) = 40,000

thank you esop guy.  so it seems the answer is 20,000 is the new max loan after repaying the 20,000 current outstanding balance.  so that wouldnt net the participant anything.  please confirm.

I agree the max new loan is $20k.  I hadn't thought about the fact that nets him zero. 

i believe you are correct based on the methodology outlined in the other thread.  can anyone else comment if this result makes any sense. im struggling why the participant nets zero.

5 minutes ago, jane murray said:

im struggling why the participant nets zero.

The most s/he can borrow is $20k due to $50k/12 month limit.  If s/he has $20k to repay the current loan, the new loan would simply replace $20k used to repay the old loan. 

so basically the participant would net zero. very strange result but i understand now. thank u both

10 minutes ago, jane murray said:

so basically the participant would net zero. very strange result but i understand now. thank u both

Is there a possibility to refinance the loan?

the plan does not allow refinancing of loans. also plan only allows one outstanding loan at a time.

1 minute ago, jane murray said:

the plan does not allow refinancing of loans. also plan only allows one outstanding loan at a time.

Ok, not much you can do at that point.

if plan allowed two outstanding loans, then the 72(p) limit would be 50,000 - (30,000-20,000) or 40,000.  the max new loan would be 40,000 - 20,000 or 20,000.  therefore in the case the plan allowed for 2 loans, the participant could receive a second loan in the amount of 20,000. correct?

No.

mr preston, can you please provide further clarification.  what would be the max new loan under the scenario the plan allowed a second loan and the original loan was not repaid.

3 hours ago, Mike Preston said:

No.

i thought i understood but now im more confused. i appreciate the guidance

9 hours ago, jane murray said:

i thought i understood but now im more confused. i appreciate the guidance

If the plan allowed 2 loans, a new loan could be issued for $20k

You have plenty of room on the 50% of balance side so your issue is going to be the $50k limit.

With highest outstanding loan in last 12 months of $30k, you could do a new loan for $20k

12 hours ago, Mike Preston said:

No.

Huh?
The current $20K in loan goes only toward the 50% loan amount.  When determining the $50K limit, you're reducing it by the highest outstanding amount.  So, if the current loan ($20K) was at $30K during the last 12 months, then the highest loan available would be $20K (provided that it does not exceed 50% of the vested balance when taken).  So, if the plan allows for 2 loans, then should would be able to take another $20K, and the new loan total would be $40K.

Good Luck!

I must have been on a sugar high.  Yes, the second loan would be limited to $20,000.  Did you run it through the spreadsheet?

1 hour ago, Mike Preston said:

I must have been on a sugar high.  Yes, the second loan would be limited to $20,000.  Did you run it through the spreadsheet?

yes mike, i ran it through the spreadsheet and the maximum new loan is 20k under the scenario if the plan allowed two loans and a new loan was taken. i was confused by your no response but i appreciate the clarification.

does everyone agrees that in the situation when only one loan is allowed and there is no refinancing option available, the participant could repay the loan balance of 20k and take out a new loan of 20k, therefore netting zero?

9 hours ago, Mike Preston said:

I must have been on a sugar high.  

the example in the IRS memorandum dated July 2017 is somewhat similar, but you are correct, it would serve no purpose to 'pay off the loan' and then take another loan as you are back at the same point.

I was not aware that the outstanding loan could have been calculated either way as indicated by the IRS

For example, a participant borrowed $30,000 in February which was fully repaid in April, and $20,000 in May which was fully repaid in July, before applying for a third loan in December. The plan may determine that no further loan would be available, since $30,000 + $20,000 = $50,000. Alternatively, the plan may identify "the highest outstanding balance" as $30,000, and permit the third loan in the amount of $20,000. loans max.pdf