A participant with a $200,000 vested balance borrowed $15,000 on July 1, 1999 and pays this off October 1, 1999. The participant wants to borrow $50,000 in December, 1999. The plan allows more than one loan. Can this participant borrow $50,000 by taking a loan of $35,000 one day and $15,000 the next?

Well, at first I screamed: "NO NO NO"! But then I looked over 72(P), and other documentation, and began to second guess myself (which is often the case lately). I posed the question to a colleague who, after much reluctance, agreed you can do it. I guess this is one of the primary disadvantages in allowing multiple outstanding loans.

Great question. I'm eager to see other responses.

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I, too, was doubtful at first. However, after reading section 72(p) carefully, it appears that you can do it.

Good catch!

I agree although there is not much potential for abuse since they are still capped at 50k even though they found a way around an arbitrary administrative rule.

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Keith R. Kost
Baker & Hostetler, LLP
3200 National City Center
1900 East Ninth St.
Cleveland, OH 44114-3485
(216) 861-7290

www.Bakerlaw.com

Yes! I agree with the foregoing. I researched this issue several years ago, and have made use of this method for clients to get to $50K.

No. Section 72(p)(2)(A)(i) reduces the amount that can be borrowed by repayments during the preceding year (actually, the excess of the highest amount of loans outstanding at any time during the year less the current balance). The flush language of 72(p)(2) gets the current principal. So, the limit is $50,000 less the highest balance in the preceding year. Follow-on loans have to wait for the one-year anniversary after each principal reduction.

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Tom:

I don't read it that way. Where exactly do you get the "one-year wait" requirement? And we are reducing the $50K limit by the repayments during the preceding year on the existing loan(s). Follow the logic in the example provided in the Pension Answer Book. (don't have the exact page handy...but I will in the morning) I've gone over this with 5 different consultants. All agree it's a loophole.

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I agree with Tom Geer. I'm not sure how other respondents could read IRC Section 72(p)(2)(A)(i) and not see the reduction for the highest outstanding loan balance over the previous twelve months from the date of the subsequent loan request. How do you ignore this?

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_________________________________________________________
Gary B. Kushner, SPHR, CBP (mailto:gkushner@kushnerco.com)
President
Kushner & Company
141 E. Michigan Avenue, Suite 400
Kalamazoo, MI 49007
(616) 342-1700
http://www.kushnerco.com

The limit in 72(p)(2)(A)(i) is "$50,000, reduced by the excess (if any) of (I) the highest outstanding balance of loans from the plan during the 1-year period ending on the day before the date on which such loan was made, over (II) the outstanding balance of the loans from the plan on the date on which such loan was made..."

In this case, item (I) would be $35,000. Item (II) would also be $35,000. The excess of (I) over (II) is zero, so the $50,000 wouldn't be reduced.

Mike

Thanks for all the responses. I keep thinking the logical answer should be no, but I can't seem to read the reg. to say no.

Tom and Gary (and others), how would you calculate the maximum loan available in this related situation:

A participant in a plan that only allows one loan at a time borrowed $20,000 in July 1, 1999 and paid it back August 1, 1999. The participant borrowed $12,000 on September 1, 1999 and paid it back October 1, 1999. The participant want to borrow the maximum available in December. Would you calculate the maximum as $30,000 ($50,000 - the highest outstanding balance in the last 12 months), or as $18,000, or as something else entirely?

John, We would use $30,000.
In response to Michael, your cite seems to ignore the introductory sentence in 72(p)(2)(A) which reads "Paragraph (I) shall not apply to any loan to the extent that SUCH LOAN [emphasis added](when added to the outstanding balance of all other loans from such plan... does not exceed the lesser of (i)..." I believe that this sentence precludes the possibility of a loop-hole.
I also recall that the conference committee notes explained that the intent of this code section revision was to ensure that employees are prevented from maintaining a perpetual $50,000 maximum loan balance, by requiring that the $50,000 be reduced by the highest outstanding loan balance during the past 12 months.


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