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Loan Limits Apply to All Plans

My company has both a 401(k) and a defined benefit plan. If both plans allow participant loans, what is the maximum amount a participant can borrow from each plan?

To determine the maximum amount a participant can borrow from the plans, you must consider all of the following:

  • both plans, as well as the plans of any related employer, as a single plan for loan purposes (Internal Revenue Code Sections 72(p)(2)(D) and 414(b),(c) and (m))
  • the plans’ limit on loans (statutory or a lesser amount)
  • the participant’s prior loans from the plans, if any, and the outstanding balance on these loans if the plans allow multiple loans
  • whether there is adequate collateral for the loan

Maximum amount for a single loan
A plan can either use the statutory limit for all plan loans (IRC Section 72(p)(2)(A)) or a lower limit.

  • Statutory maximum
    All of a participant’s loans from a plan are limited to the lesser of:
    1. $50,000, reduced by:
      • the highest outstanding balance of loans during the 12 months ending the day before the new loan, minus
      • the outstanding balance of loans on the day of the new loan; or

    2. the greater of:
      • one-half the participant’s vested plan account balance (the present value of the participant’s vested accrued benefit for defined benefit plans), 
      • or $10,000.

Example 1
Bob’s vested account balance in his 401(k) plan is $120,000 and the present value of his vested accrued benefit in the same employer’s defined benefit plan is $100,000. Bob, who is unmarried, hasn’t previously taken any loans from these plans. Bob’s maximum loan limit is the lesser of:

    1. $50,000; or
    2. the greater of:
      • $110,000 (½ of ($120,000 + $100,000)), or
      • $10,000.

    Bob can get a loan of up to $50,000.

    • Lower limit set by a plan’s terms
      A plan may limit a participant’s loan to an amount less than the statutory maximum.

    Example 2
    Using the same facts as in example 1, except the plans have a maximum loan limit of the lesser of $40,000 or ½ of a participant’s vested account balance (the present value of the participant’s vested accrued benefit for the defined benefit plan), Bob can get a maximum loan of $40,000.

    Maximum amount for multiple loans
    If a plan allows participants to take multiple loans, all of a participant’s loans must not exceed the maximum loan amount (statutory or as set by the plan’s terms).

    Example 3
    Jane’s vested account balance in her 401(k) plan is $60,000 and the present value of her vested accrued benefit in the same employer’s defined benefit plan is $120,000. Both plans use the statutory maximum for loans. Ten months ago, Jane, an unmarried participant, took a $15,000 loan from the defined benefit plan and still owes $5,000 on that loan. Her maximum limit for all loans (new plus any outstanding) is the lesser of:

      1. $40,000 ($50,000 – ($15,000 - $5,000)); or
      2. the greater of:
        • $90,000 (½ of ($60,000 + $120,000)); or
        • $10,000.

      Because Jane’s outstanding balance of her first loan is $5,000, Jane can take a new loan of up to $35,000 (the lesser of 1 or 2 above minus her first loan’s outstanding balance ($40,000 – $5,000)). Review the Collateral section below if Jane wants to borrow the entire $35,000 from her 401(k) plan.

      Collateral
      Each plan must have adequate collateral for a loan from the plan. Additionally, if the plan is subject to:

      • ERISA, the plan can’t use more than 50% of the participant’s vested account balance (present value of the vested accrued benefit in a defined benefit plan) in that plan as collateral for loans from that plan (DOL Reg. Section 2550.408b-1(f)); and

      • survivor annuity requirements, the plan must obtain spousal consent for any plan loan to a married participant if more than $5,000 of the account balance (present value of the accrued benefit in a defined benefit plan) is used as security for the loan (Treas. Regs. Section 1.401(a)-20).   

      Example 4 – additional collateral
      Using the same facts as in example 3, if Jane wanted to borrow $35,000 from only her 401(k) plan, which is subject to ERISA, the plan sponsor would have to request additional collateral for $5,000 of the loan because $35,000 is $5,000 more than 50% of Jane’s vested account balance in the 401(k) plan (50% x $60,000 = $30,000). Alternatively, Jane can borrow up to $30,000 from her 401(k) plan and $5,000 from her defined benefit plan without having to provide additional collateral.

      Example 5 – spousal consent
      Using the same facts as in example 3, if Jane is married and she wants to borrow $10,000 from her defined benefit plan and $25,000 from her 401(k) plan, she wouldn't have to provide additional collateral because the amount she wants to borrow from the 401(k) plan doesn't exceed 50% of her vested account balance in that plan and the amount she wants to borrow from her defined benefit plan doesn't exceed 50% of the present value of her vested accrued benefit. Assuming the 401(k) plan isn't subject to survivor annuity requirements (few are), no spousal consent is required for the loan from that plan. However, Jane would have to obtain spousal consent for her loan from the defined benefit plan because she wants to borrow more than $5,000 from a plan that is subject to the survivor annuity requirements.

      Additional resources:

Page Last Reviewed or Updated: 05-Nov-2013