Maximum loan limits

A recordkeeper has me so confused over the calculation of the maximum loan amount.  I do not agree with their methodology and would like some clarification.

1.  Does the $50,000 loan limit only apply in the case where the participant has a vested account balance over $100,000?

2.  What is considered the highest outstanding balance of loans during the last 1 year period?  Would that be the one day in a 365 period in which the participant had their highest loan balance or if they had 3 loans in a one year period are you looking at the highest balance of each loan in that 1 year period?

Participant has 2 outstanding loans as of 11-05-17, say loan 1 and 2.  The balance of both at that point in time was $32,000.  In April 2018, participant pays off loan 1 and take another loan (3) for $14,000.  Current vested account balance including the loans is $72,000.  Current outstanding loan balance of loan 1 and 3 is $29,000.

The recordkeeper is saying that all 3 loans should be taken into consideration in determining the highest outstanding balance by adding the balance of loans 1 and 2 from a year ago and the loan from April, so $32,000+$14,000 = $46,000

Participant wants to refinance loan 3 as the plan only permits the participant to have 2 loans outstanding at a time.  We are arguing over what is available, if any, for the participant to get as additional loan funds.

1.  For all reasonable purposes, yeah - if the balance is less than 100,000 then the 50,000 loan maximum isn't going to apply.

2. The IRS had a minor announcement last year that either way is acceptable to calculate it.  Since the Plan Administrator gets the final call as to what's permitted, then they need to tell the recordkeeper that the plan will use the "highest loan balance on any one day in the last 365" method.

15 hours ago, Ajillity said:

1.  Does the $50,000 loan limit only apply in the case where the participant has a vested account balance over $100,000?

The Maximum loan is the lesser of $50,000 or 50% of the vested balance.  If the vested balance is less than $100,000, the maximum available loan will be less than $50,000

15 hours ago, Ajillity said:

2.  What is considered the highest outstanding balance of loans during the last 1 year period?  Would that be the one day in a 365 period in which the participant had their highest loan balance or if they had 3 loans in a one year period are you looking at the highest balance of each loan in that 1 year period?

Participant has 2 outstanding loans as of 11-05-17, say loan 1 and 2.  The balance of both at that point in time was $32,000.  In April 2018, participant pays off loan 1 and take another loan (3) for $14,000.  Current vested account balance including the loans is $72,000.  Current outstanding loan balance of loan 1 and 3 is $29,000.

The recordkeeper is saying that all 3 loans should be taken into consideration in determining the highest outstanding balance by adding the balance of loans 1 and 2 from a year ago and the loan from April, so $32,000+$14,000 = $46,000

Participant wants to refinance loan 3 as the plan only permits the participant to have 2 loans outstanding at a time.  We are arguing over what is available, if any, for the participant to get as additional loan funds.

The IRS issued this memo back in July of 2017 in regards to the computation of the maximum loan amount under IRC § 72(p)(2)(A).  In the memo, the IRS says that a plan could determine that the highest outstanding balance is could be either the highest balance at one point during the year or a total of all loans during the year.

Quote

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.

So, both $32,000 and $46,000 are acceptable as "the highest outstanding balance".

While it is up to the plan to make the determination, most recordkeepers will probably insist on THEIR determination rather than yours depending on how their system is set up. 

16 hours ago, Ajillity said:

1.  Does the $50,000 loan limit only apply in the case where the participant has a vested account balance over $100,000?

 

Someone has a $60k balance and borrows $30k, then pays it off one month later. The 10 months later they request a new loan. What is their maximum? $20k. So the $50k limit can come into play with balances less than $100k.

Thank you all for your replies.  I did send the recordkeeper the DOL memo previously, but like RatherBeGolfing, said, I feel they are forcing us to use their determination.  Yet their determination is wrong and no one has yet to show me the math behind their calculation that the participant only has $40 available for a new loan.  I am still waiting for an explanation, but I really feel as if the answer will be the system says $40, so it must be right.