IRS Clarifies Computation of Plan Loans Available to Participants

In a memorandum to Employee Plans (EP) examination employees, the Internal Revenue Service (IRS) has clarified there are two ways an employer can determine the highest outstanding loan balance in the past year when calculating the amount of an additional loan a participant can take from her defined contribution (DC) plan.

The IRS notes that in general, Internal Revenue Code (IRC) § 72(p)(1) provides that a loan from a plan is a distribution to the participant. IRC § 72(p)(2)(A) excepts a loan that does not exceed the lesser of:

• $50,000, reduced by any excess of  the highest outstanding balance of loans during the 1-year period ending on the day before the date on which such loan was made, over the outstanding balance of loans on the date on which such loan was made; or
• the greater of half of the present value of the vested accrued benefit, or $10,000.

Under IRC § 72(p)(2)(A)(i), if the initial loan is less than $50,000, the participant generally may borrow another loan (if the plan allows) within a year if the aggregate amount does not exceed $50,000. The $50,000 is reduced by the highest outstanding balance of loans during the one-year period ending the day before the second loan, in turn reduced by the outstanding balance on the date of the second loan. 

The agency gives an example: A participant borrowed $30,000 in February which was fully repaid in April, and $20,000 in May which was fully repaid in July, before applying for a third loan in December. The plan may determine that no further loan would be available, since $30,000 + $20,000 = $50,000. Alternatively, the plan may identify “the highest outstanding balance” as $30,000, and permit the third loan in the amount of $20,000. This assumes that to meet other IRC § 72(p)(2) requirements, the participant has a vested accrued benefit of more than $100,000, and the loan is repayable in five years and requires substantially level amortization. 

“At this time, the law does not clearly preclude either computation of the highest outstanding loan balance in the above example,” the IRS says.