On July 26, 2017, the IRS released a memo which clarifies a previous memo issued in April 2017 regarding retirement plan loan rules when a participant requests more than one loan during the year.
As background, the April 2017 memo gave employers instructions on how to calculate the maximum loan amount a participant could take out if the individual had other loans during the same plan year. According to the IRS, the maximum loan amount allowed is restricted to either 50 percent of the participant’s vested account balance or $50,000 minus any outstanding loan balance (whichever is less). Besides being reduced by any existing outstanding loan balance, the $50,000 limit is further reduced by the excess of the highest outstanding loan amount during the prior year over the outstanding loan balance, if applicable. This additional restriction applies to the $50,000 maximum only; it does not apply to the 50 percent vested amount balance.
The April 2017 memorandum, however, misstated the interaction between the current outstanding loan amount and the one-year highest outstanding loan balance. The revised version corrects any confusion by confirming that another loan is allowed if it does not exceed the lowest of $50,000 reduced by the excess amount or is not more than 50 percent of the vested amount when added to the outstanding balance of all other loans.
For example, a participant with a vested balance of $150,000 borrowed $30,000 in February which she repaid in full by April, then in May, she borrowed another $20,000 which was repaid in July. In December, she requests another loan. According to the memo, the plan has two options: The plan could either determine that no further loan could be provided because $30,000 + $20,000 = $50,000, which is the highest outstanding loan balance within one year; or determine that the largest loan during the one-year period is $30,000 and permit the third loan in the amount of $20,000.
Therefore, according to the rules, if a participant made two or more loans in a one-year period, the employer should calculate the highest outstanding balance by using one of the two methods described above. Ultimately, whatever approach the plan adopts must be used consistently and the plan sponsor should outline the methodology in the plan’s loans procedures.
Employers should work with outside counsel in checking their plan design for compliance.
IRS Memo »