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Issue Snapshot - Borrowing Limits for Participants with Multiple Plan Loans

Code Section 72(p)(2)(A) sets forth limits on participant loans from a qualified retirement plan. A plan may permit a participant to take multiple loans provided that:

  1. Each loan satisfies the repayment requirement of IRC Section 72(p)(2)(B) and the level amortization requirement of IRC Section 72(p)(2)(C), and
  2. The total amount of all loans to the participant do not exceed the IRC Section 72(p)(2)(A) amount limitation.

IRC Section and Treas. Regulation

Resources

  • 2009 CPE, Chapter 6, Participant Loans
  • Field Memorandum dated July 26, 2017 (determining the IRC Section 72(p)(2)(A) amount limitation with multiple loans)

Analysis

A qualified retirement plan may, but is not required to, provide for loans. If a plan provides for loans, the plan may limit the amount that may be taken as a loan to an amount that is set forth in the plan document. However, the maximum amount that can be borrowed at any time cannot exceed the amount that is set forth in IRC Section 72(p)(2)(A).

IRC Section 72(p)(2)(A) provides that the amount of a participant loan, when added to the outstanding balance of all other loans from all plans of the employer, may not exceed the lesser of:

(A) $50,000, reduced by the excess (if any) of (i) the highest outstanding balance of plan loans during the one-year period ending on the day before the date on which the loan was made over (ii) the outstanding balance of plans loans on the date on which the loan was made, or

(B) the greater of (i) 50% of the present value of the participant’s vested accrued benefit or (ii) $10,000.

For purposes of this calculation, an employer’s plan includes plans of all members of a controlled group of employers, of trades and businesses under common control, and of members of an affiliated service group.

Reg. Section 1.72(p)-1, Q&A-20(a)(1), provides that, in general, a participant who has an outstanding loan that satisfies IRC Section 72(p)(2) may borrow additional amounts if, under the facts and circumstances, the loans collectively satisfy the IRC Section 72(p)(2)(A) limitation and the prior loan(s) and the additional loan(s) each satisfy the requirements of IRC Section 72(p)(2)(B) and (C).

To determine the maximum loan amount, the $50,000 limit is reduced by the difference between the highest outstanding loan balance of all of the participant’s loans during the one-year period before the loan is made and the outstanding loan balance of all the participant’s loans at the time the new loan is made. In addition, the adjusted maximum loan amount is further reduced by the current outstanding balance of loans on the day the new loan is made. The loans cannot exceed the lesser of that amount or the greater of 50% of the participant’s vested accrued benefit or $10,000.

Loan refinancing

Special rules apply to loan refinancing. The regulations permit a loan to be refinanced. In a refinancing, the prior loan is replaced by a new loan. A participant may wish to do this in order to take advantage of a lower interest rate. The loan that is replaced is treated as repaid at the end of the transaction. The loan being replaced is called the replaced loan. The new loan resulting from the transaction is referred to as the replacement loan. For purposes of the amount limitation of IRC Section 72(p)(2)(A) (as discussed above), both the replaced loan and the replacement loan are treated as outstanding at the time of the refinancing if any portion of the replacement loan has a later repayment date than the replaced loan. See Reg. Section 1.72(p)-1, Q&A-20(a) and Example 1 of Reg. Section 1.72(p)-1, Q&A-20(b).

Examples

Example 1: Calculation of the maximum amount of loan when there are no prior loans.

Assume that Plan A permits participant loans.

Joseph’s vested account balance is $15,000. Joseph can borrow up to $10,000, even though this amount exceeds half his vested account balance. Sally’s vested account balance is $125,000. Sally can borrow $50,000.

Example 2: Calculation of the maximum amount of loan when there are prior loans.

Assume that Plan B permits participant loans (including multiple loans).

Mark has a vested account balance of $200,000 and took a loan for $40,000 on August 1, 2013. On December 1, 2015, when the loan balance is $25,000, Mark wants to take another loan from the plan. The loan balance on December 1, 2014, was $32,000. The maximum amount that Mark can borrow is $18,000. This is calculated by first determining the repaid loan amount for the one-year period before the loan was made. That amount is $7,000. It is the difference between the highest outstanding loan balance for the one-year period ending on December 1, 2015 ($32,000) and the outstanding balance on the day of the loan ($25,000). The $50,000 limit is reduced by the repaid loan amount to $43,000 ($50,000 - $7,000). Therefore, the maximum amount of the new loan is the reduced limit minus the outstanding balance on the day of the loan, which is $18,000 ($43,000 - $25,000).

Example 3: Calculation of the maximum amount of loan when the prior loan was for $50,000.

Assume that Plan C permits participant loans (including multiple loans).

Leah received a loan on March 1, 2014, for $50,000, with amortization made on a quarterly repayment schedule. Assume the outstanding balance on September 1, 2014, was $35,000, because the participant paid extra amounts toward principal. The repaid loan amount for the one-year period before the loan was made is $15,000 ($50,000 - $35,000). Therefore, the $50,000 loan limit is reduced to $35,000 ($50,000 - $15,000). As the adjusted maximum amount ($35,000) is the same as Leah’s outstanding balance on September 1, 2014, Leah cannot receive an additional loan on September 1, 2014.

Note: If a balance of $50,000 existed at any time during the prior one-year period, a new loan is not permitted, even if the prior loan was completely repaid.

Audit tips

  1. Does the plan document allow loans? If so, does it allow multiple loans?
  2. Does the employer sponsor any other qualified plans? If so, does the participant have any loans from those plans?
  3. If a participant has multiple loans from this plan or other plans of the employer, are all loans considered to calculate the IRC Section 72(p)(2)(A) limit, or if lower, a plan-imposed limit?
  4. Does a participant have two or more loans outstanding during a one-year period? If yes, review Field Memorandum dated July 26, 2017, and determine if the plan has computed “the highest outstanding balance,” for purposes of applying the IRC Section 72(p)(2)(A) limit, in one of two ways described in the Field Memorandum. One way looks at the single highest outstanding balance of all loans during the one-year period. The other way looks at the total of the highest outstanding balance of each loan during the one-year period.
  5. What is the participant’s vested account balance in the plan (or plans, if applicable)?
  6. Secure a copy of the loan document for each participant loan and review the amount, date, and repayment schedule of each loan.
  7. Check to see if the plan permits refinancing of plan loans. If so, check whether the refinancing of loans satisfies the requirements in Reg. Section 1.72(p)-1, Q&A-20.