Understanding Participant Loan Limits - July/August 2015

As a plan sponsor, you are not required to offer plan loans. Many employers make this feature available, however, to encourage participation. The reasoning is that if your employees — particularly younger, lower paid employees — know they can access the money in their plan accounts, they'll be more comfortable contributing to your plan.

Not surprisingly, as money has gotten tighter over the past few years, employers have seen an increase in requests for plan loans. Following is an overview of the rules governing how much participants may borrow.

Calculating maximum loan amounts

The law places a cap on the maximum loan amount(s) a participant may take from an employer's combined qualified retirement plan(s). The maximum allowable loan amount is the lesser of 50 percent of a participant's vested account balance, less any outstanding loan balance, or $50,000. If the participant has had a loan in the preceding 12 months, the $50,000 limit is reduced by the highest outstanding loan balance during that time, even if the loan has been repaid.

Example 1: Plan participant Wayne requests a loan of $50,000 on January 15, 2015. His vested account balance on that day is $150,000. Wayne had an outstanding loan in the last 12 months and the highest outstanding balance during that period was $37,000. He repaid the loan in its entirety on December 31, 2014. Even though the loan was repaid, the $50,000 is reduced by $37,000, so the maximum amount Wayne may borrow on January 15 is $13,000.

Example 2: Plan participant Chuck requests a loan for the maximum amount possible. His vested account balance is $32,000, and he currently has an outstanding loan of $3,000. The highest outstanding balance of that loan in the previous 12 months was $6,000. The maximum allowable loan for Chuck is the lesser of $50,000 − $6,000 = $44,000 or 50 percent of $32,000 = $16,000. Since Chuck has an outstanding loan balance of $3,000, the most he can borrow is $16,000 − $3,000 = $13,000.

Note: The limit of 50 percent of the participant's vested account balance is applicable at the time the loan is taken and not thereafter.

Example 3: Liz has a vested account balance of $5,000 and takes a loan of $2,500 on March 1. On March 2, investment losses in the stock market reduce the value of Liz's remaining funds to $2,300. This does not violate the 50 percent rule.

Minimum loan amount

DOL regulations permit a plan to establish a minimum loan amount as long as it is not greater than $1,000.

Determining account balance

Employer contributions plus earnings and employee contributions plus earnings are counted towards a participant's account balance (but not individual retirement account (IRA) equivalents, such as voluntary deductible employee contributions and deemed IRA amounts).

Aggregation

All plans of an employer, including plans of affiliated service groups or a controlled group of employers, are aggregated for the purposes of determining maximum participant loan amounts.

Example: Companies A and B are a two-company-controlled group, and John has worked for both companies. He has vested account balances of $80,000 in company A and $70,000 in company B. What's the maximum amount John may take as a loan?

Because the companies are a controlled group, the maximum amount John can borrow is based on the combined value of his vested account balances. In other words, he is not permitted to get one loan based on $80,000 and another based on $70,000. The maximum loan amount is based on the total of his two vested account balances: $80,000 + $70,000 = $150,000. Therefore, the most John can borrow is $50,000.

* The rules and procedures regarding alternate collateral are complicated, and the practice is generally discouraged.

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