Loan

Definition

Amount borrowed by a participant from his or her vested balance under a qualified plan , 403(b) or 457(b) plan.

Loans are limited to the lesser of  the following:

• $50,000, reduced by the excess (if any) of
  • 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
  • the outstanding balance of loans from the plan on the date on which such loan was made, or
• the greater of
  • one-half of the present value of the nonforfeitable accrued benefit of the employee under the plan, or
  • $10,000.

Some plans do not permit the $10,000 option, and limit loans to the lesser of 50% of the participant’s vested account balance or $50,000

Loans must be repaid within 5 years  unless the loan is used to acquire any dwelling unit which within a reasonable time is to be used (determined at the time the loan is made) as the principal residence of the participant.

Referring Cite

IRC § 72(p), DOL Reg. 2550.408b-1

Additional Helpful Information

• If the loan does not meet the requirements of IRC § 72(p), the amount received by the participant may be treated as a distribution
• Loans must be repaid in substantially level amortization over the term of the loan, with payments made not less frequently than quarterly
• Interest paid on these qualified plan loans are not deductible
• Prior to 2002, loans could not be made to owner-employees. EGTRRA removed this restriction for plan years beginning 01/01/2002

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