3958 / Are there limits on the amount that can be borrowed under a qualified plan loan?

Editor’s Note: The CARES Act relaxed the rules to provide relief for qualified plan participants with existing plan loans. See Q .  The SECURE Act 2.0 amended the rules governing loans taken from retirement plans due to a federal disaster.  The limit on such loans is increased to the lesser of $100,000 or 100 percent of the individual’s vested account balance when the participant (1) lives in a federal disaster area, (2) suffers an economic loss due to the disaster and (3) takes the distribution within 180 days of the date the disaster occurs.  Existing loan payments that are due within 180 days of the disaster can be delayed for up to one year (and the five-year repayment deadline may also be extended).

The amount of the loan, when added to the outstanding balance of all other loans, whenever made, from all plans of the employer, may not exceed the lesser of (1) $50,000 (reduced by the excess of the highest outstanding balance of plan loans during the one-year period ending on the day before the date when the loan is made over the outstanding balance of plan loans on the date when the loan is made), or (2) one-half of the present value of the employee’s non-forfeitable accrued benefit under the plans, determined without regard to any accumulated deductible employee contributions. A plan may provide that a minimum loan amount of up to $10,000 may be borrowed, even if it is more than one-half of the present value of the employee’s non-forfeitable accrued benefit.¹ For valuation purposes, a valuation within the prior 12 months may be used, if it is the latest available.²

If a loan does not meet the dollar limitation, distribution of the amount in excess of the dollar limit is deemed to occur when the loan is made.³ If the outstanding loan balance meets the dollar limitation immediately after the date when the loan is made, the loan will not be treated as a distribution merely because the present value of the employee’s non-forfeitable accrued benefit subsequently decreases.⁴