3960 / What special rules apply to residence loans from a qualified plan?
If a plan has a program to invest in residential mortgage loans, loans made in the ordinary course of the program are not subject to the rules that apply to plan loans. Loans that benefit an officer, director, or owner of the employer maintaining the plan or their beneficiaries are not treated as made under an investment program and are subject to the limitations of IRC Section 72(p) ( Q 3954). An investment program exists if the plan has established that a certain percentage or amount of plan assets will be invested in residential mortgages available to persons who satisfy commercially customary financial criteria.1
If a loan is to acquire a dwelling unit that is to be, within a reasonable time, the principal residence of the participant, it will not be subject to the otherwise applicable 5-year term requirement ( Q 3954).2 The determination of whether the unit is to be used, within a reasonable time, as the participant’s principal residence is made when the loan is made. Legislative history indicates that a dwelling unit includes a house, apartment, condominium, or mobile home not used on a transient basis. The determination of whether plan loan proceeds are used for the purchase or improvement of a principal residence is made using the tracing rules under IRC Section 163(h)(3)(B).3
A principal residence loan can include a plan loan used to repay a third-party loan used to pay a portion of the purchase price if the plan loan would qualify as a principal residence loan without regard to the third-party loan.4 For example, on July 1, 2023, a participant requests a plan loan to acquire a principal residence to be paid in level monthly installments over 15 years. On August 1, 2023, the participant acquires a principal residence, paying a portion of the purchase price with a bank loan. On September 1, 2023, the plan makes the loan and the participant uses it to repay the bank loan. The regulations state that the plan loan qualifies as a principal residence loan, considering the IRC Section 163(h)(3) tracing rules.5