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Maximum Loan Calculations: IRS Surprise

Based on the IRS newsletter article in April 2015 and with the release in late February 2017 of hardship documentation guidance, we were not surprised by the IRS’ recent release of guidance on participant loans. However, we were surprised by the issue the guidance actually addressed.

The IRS issued guidance related to the maximum amount that can be borrowed when a participant takes multiple loans in a given 12-month period. Under Code Section 72(p), the maximum allowable loan is the lesser of either:

1. one-half the participant’s vested account balance minus any outstanding loans; or
2. $50,000 minus the highest outstanding loan balance in the preceding 12 months, even if repaid.

If a participant’s vested account balance exceeds $100,000, the $50,000 limit always comes into play.

The example that the IRS presented is somewhat unusual, as it addresses not only a participant taking multiple loans in a given year, but also quickly repaying each loan. The example is of a participant with a vested account balance in excess of $100,000, so the $50,000 limit come into play:

The participant borrows $30,000 in February repaying the full amount in April. In May she borrows the maximum amount of $20,000 ($50,000-$30,000). She repays that amount, in full, two months later in July. Before the end of the year, she seeks another loan.

The question is: Is she eligible? And, if yes, how much can she borrow? The IRS points out that there are two possible approaches to the answer, either of which is acceptable.

One approach is to say that the participant already borrowed the maximum $50,000 in the preceding 12 months so no loan is available at that time. But a closer reading of the limitation is that the limit is reduced by the highest outstanding balance in the preceding 12 months. The highest outstanding balance was the original $30,000 loan. Thus, just as in May, the limit would be $50,000 - $30,000 or $20,000.

In the latest guidance the IRS says that in the event of a plan examination, if a participant has taken multiple loans within a 12-month period and either approach discussed above was used to determine the maximum amount, then Code Section 72(p) is satisfied and no further inquiry is required.

That was the directive provided in a Memorandum to the Employee Plans Division Examinations employees that will be incorporated into the Internal Revenue Employee Manual § It is interesting to note that the recent Hardship Withdrawal Document Substantiation guidance was also issued by means of a Memorandum to Examination Employees. During the recent ASPPA Eastern Regional Conference, it was suggested that this was a new way to issue guidance while complying with the restrictions imposed by the Trump administration. The response provided by Donald Keiffer of the IRS is that the IRS has been issuing this type of Memorandum for a long time, but they are now making a concerted effort to publicize them.

Nonetheless, the memorandum carries the following advisory:

This is not a pronouncement of law and is not subject to use, citation, or reliance as such. Nothing herein shall affect the operation of any other provision of the IRC, Treasury Regulations, or guidance thereunder.

It should be assumed that we will be seeing more Memoranda publicized in this manner.

Richard Hochman is the Director of Retirement Plan Consulting Services at Actuarial Systems Inc. He serves as ASPPA’s 2017 President.