allocate loan interest in pooled 401(k) plan

Last year we took over TPA work on a medical practice's SH 401(k) with all assets held in pooled Schwab account.

Doctor took out plan loan at the end of 2019, and during 2020 made regular loan payments as deductions from his pay check.

When allocating earnings for 2020, do you allocate the loan interest only to the doctor?  Or is that interest combined with other plan earnings/losses and allocated across the board to all eligible participants the same as other plan investment income or losses?

Thanks!

What does the Plan Document say?

12 minutes ago, M Norton said:

Last year we took over TPA work on a medical practice's SH 401(k) with all assets held in pooled Schwab account.

Doctor took out plan loan at the end of 2019, and during 2020 made regular loan payments as deductions from his pay check.

When allocating earnings for 2020, do you allocate the loan interest only to the doctor?  Or is that interest combined with other plan earnings/losses and allocated across the board to all eligible participants the same as other plan investment income or losses?

Thanks!

 

Depends on the document.  Does the plan treat loans as a segregated investment (Earnings to participant with loan) or as an investment of the trust (earnings to all)

Plan document should specify if loan is treated as general asset of the trust (allocate interest to all, do not reduce participant balance for loan) or as directed investment (reduce balance, allocate principal and interest to just him).

On 3/16/2021 at 12:23 PM, RatherBeGolfing said:

Depends on the document.  Does the plan treat loans as a segregated investment (Earnings to participant with loan) or as an investment of the trust (earnings to all)

Agree 100%, but it would be very unusual in my experience for a DC plan not to treat loan as segregated investment. But definitely check the plan document, M Norton.

Thanks for the great advice!  Per a review of the plan document, I find "If the Adoption Agreement does not permit Participant self-direction, any assets that are held in the form of a Participant loan ... shall be treated as a segregated investment."  I had looked at the plan document but somehow didn't pick up on this until I saw your responses, especially Luke Bailey who added his comment about it being unusual for a loan not to be a segregated investment.  Much appreciated!!