Maximum Loan Amount Across Multiple Plans

“We are a public university system that sponsors separate 401(a), 403(b) and 457(b) plans, all of which allow loans. Do all three plans need to be aggregated in determining the maximum a participant may borrow? I read your Ask the Experts column on the subject, but it only references 401(k) and 403(b) plans.”

Charles Filips, Kimberly Boberg, David Levine and David Powell, with Groom Law Group, and Michael A. Webb, senior financial adviser at CAPTRUST, answer:

As mentioned in our prior column on the subject, the maximum amount that the participant may borrow is restricted by the Internal Revenue Code and requires all “qualified employer plans” sponsored by an employer to be treated as one plan for this purpose under IRC section 72(p)(2)(E)(ii). However, our prior column does not clarify whether loans from a 457(b) plan should also be aggregated with 401(a) and 403(b) loans. To find the answer to your question, we must refer to the relevant portions of IRC Section 72(p), which lists the types of plans to be aggregated, as follows:

(2)(E) Related employers and related plans

For purposes of this paragraph—

(i)the rules of subsections (b), (c), and (m) of section 414 shall apply, and

(ii)all plans of an employer (determined after the application of such subsections) shall be treated as 1 plan.

(4) Qualified employer plan, etc.

For purposes of this subsection—

(A) Qualified employer plan

(i)In general

The term “qualified employer plan” means—

(I)a plan described in section 401(a) which includes a trust exempt from tax under section 501(a),

(II)an annuity plan described in section 403(a), and

(III)a plan under which amounts are contributed by an individual’s employer for an annuity contract described in section 403(b).

(ii)Special rule

The term “qualified employer plan” shall include any plan which was (or was determined to be) a qualified employer plan or a government plan.

(B) Government plan

The term “government plan” means any plan, whether or not qualified, established and maintained for its employees by the United States, by a State or political subdivision thereof, or by an agency or instrumentality of any of the foregoing.

As the IRC Section clearly references 401(a) and 403(b) plans, those plans must be treated as one plan for purposes of calculating the loan limits under 72(p). Though 457(b) plans are not directly referenced, a “qualified employer plan” under IRC Section 72(p) includes a “government plan,” which means “any plan, whether or not qualified, established and maintained for its employees by the United States, by a State or political subdivision thereof, or by an agency or instrumentality of any of the foregoing.” A 457(b) plan is indeed a type of nonqualified plan, so presuming that as a public university you otherwise satisfy the “government plan” definition listed here, your eligible governmental 457(b) would be aggregated with your other plans for loan limit purposes as well.

As a note of caution, it is very important to be mindful of the IRC Section 72(p) limits. Any loan amount from an eligible governmental 457(b) plan to a participant or beneficiary that doesn’t satisfy IRC 72(p)(2) is treated as though the participant received it as a distribution from the plan under IRC 72(p) and is includible in their or their beneficiary’s gross income for the taxable year in which the loan is made. (26 CFR 1.457-7(b)(3)).