I have a participant in a PS plan who currently has a loan. She is wanting to take out a new loan and pay the current loan off. The plan allows this.

From my calculations, she does not have enough money in her PS account to get a new loan. Can someone please recheck my figures and see if I am doing something wrong?

Profit Sharing Balance 9/30/03 is $16,960.45.
1/2 of Balance is $8,480.23.
Highest Loan Balance in past 12 months is $5,855.61.
Current Loan Blance is $4,776.98.

Thanks in advance for your help.

Assuming the loan limits provided document are parallel to the IRC; participant could take out an additional $5,223.02 ($10,000-current balance). Remember though that only 50% of vested balance can be used as colatteral so an additional source of colatteral would be required.

I agree with R. Butler

She is able to borrow:

$3703.25 if the plan does not allows the $10,000 limit- no additional security required or
$5,223.02 if the plan allows the $10,000 limit- security required

(the $10,000 limit allows the participant to borrow up to $10,000 even if the amount exceeds 50 %)

The plan does not allow for the $10,000 limit.

So the new loan would be for $8,480.23. After paying off her existing loan balance of $4,776.98, she would receive loan proceeds of $3,703.25. The payments would be based on $8,480.23.

I'm confused now. Where does the highest loan balance in the past 12 months come into play?

Thanks.

Calculation:

Maximum loan amount is the lesser of A or B

A = $50,000 reduced by the highest outstanding balance during the last twelve months
=$50,000 - $5,855.61 = $44,144.39

B = greater of b-1 and b-2

b-1 =( vested balance x 50% ) – current outstanding balance
= ($16,960.45 X 50%) - $4,776.98.
= $8,480.23 - $4,776.98 =$3703.25


b-2 = $10,000 - current outstanding balance
= $10,000 - $4,776.98 =$5,223.02


$5,223.02 is the greater of b-1 and b-2

$5,223.02 is also lesser than A

But $5223.02 would exceed the 50% balance, and would require additional security

Thanks, Appleby!

Remember the $10,000 is only if the plan allows, and if a self directed plan it most likely does NOT allow.

You did not tell us if the balance INCLUDES the current loan or not. It should include the loan to do the math correctly.

I'm not sure this is necessarily correct. If participant wants to refinance, they would have to repay the full $8,480 within the original repayment term of the $4,777 loan. Otherwise it would probably be easier for the Participant just to have 2 outstanding loans, the original loan and a new loan for $3,703. (I guess you could still combine them to one loan still, but you gotta be careful with the amortization schedule; that $4,777 still has to be repaid by the original due date and you would still have to amortize the $3,703 over no more than 5 yrs. Personally thats too much work for me.)