"A client want's to take a second loan. I looked at the IRS' explanation and it is not how I have been calculating 2nd loans. In the end I have been more strict (it appears). Am I wrong? ...

IRS Example: Jim’s vested account balance is $80,000. He borrowed $27,000 eight months ago and still owes $18,000 on that loan. ...  Maximum second loan if amount still owed on first loan: Jim’s current loan balance is $18,000. This amount plus the new loan cannot exceed the lesser of:

1. $50,000 - ($27,000 - $18,000) = $41,000, or
2. $80,000 x 1/2 = $40,000

Jim’s total permissible balance is $40,000, of which $18,000 is an existing loan balance. This leaves a new maximum permissible loan amount of $22,000 ($40,000 - $18,000).

I always said that you take the vested balance to find the maximum loan amount for the 1st loan. If a 2nd loan is requested regardless of whether the 1st is paid off or not, this is how you calculate the maximum allowed: First, determine what the maximum loan amount can be right now Next, If the participant has an existing loan (or had a loan in the past 12 months), look to see what the highest balance of that loan was and subtract it from what the participant's could borrow now had s/he never had a loan THAT is what they can borrow. Using the IRS' example I would say that Jim could only borrow $13,000 ($40,000 maximum allowable less highest outstanding balance in the past 12 months or $27,000..... 40,000 - 27,000 = 13,000), not $22,000 It's a big difference. The IRS' example is more beneficial. Have I been wrong all these years?"

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