I have a default loan question I would like to tap some expertise on.

We have a participant who defaulted on a loan. The amount of the loan when it went into default was $20,158 back in 9/1999, The guy wants another loan. The current running interest loan balance is now $25,740.

When taking into considering the amount of his vested balance which would you take for coming up with his vested balance:
1?) 20,158 + his current vested balance of 30,444 or
2?) 25,740 + his current vested balance of 30,444

then we would take 50% of either option 1 or 2 above less the outstanding loan balance

We are busting our brains in trying to interpret loan language we rarely use.

My vote is that interest keeps accruing and is part of the loan balance at the time you do the calculation of eligibility for the new loan.

Does the Plan Administrator have a fuciduciary obligation to not approve a loan when the chance of non-payment is substantial?

I agree, but it would be best if the plan provided discretion to refuse to allow loans in these circumstances.

The 72(p) regs proposed last year, Q&A 19, specify that the defaulted loan and all accrued interest should be considered in determining the permissible amount of any subsequent loan. I am nor sure whether the IRS considers this a "new" rule or simply a clarification of old rules.

What is new, in Q&A 19 is the requirement of additional security for a loan after a defaulted loan. I think the IRS has taken some heat on this proposal and I am not sure of the status of these proposed regs.