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Apologies in advance question... Here is the scenario...

Customer Question
Hello. Apologies in advance...
Hello. Apologies in advance for the long question...
Here is the scenario...
I've requested two loans from my 401K provider for a down payment on a house in the last month. Unfortunately, each of my requests from my 401K provider were wrong in some way - the first one had the wrong term length (which I didn't notice until the check was in the mail). The second one - my wife requested while I was on a business trip and requested the wrong amount (too low - which I didn't catch until the check was in the mail). Both loans were promptly deposited and paid back immediately - but now we aren't able to get a loan for the right amount with the right term - because we've come within $2,000 of our annual $50,000 limit. $2,000 is now the only amount we can borrow. Is there any way to appeal to the IRS to have the first two loans invalidated so we can start over? We're already very far along in the home purchasing process and we're about to close on our home, but now we don't have the down payment funds. Do we have any options at this point? Thank you.
Submitted: 1 year ago.Category: Tax
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Answered in 18 minutes by:
6/13/2016
Tax Professional: Lane, JD, CFP, MBA, CRPS replied 1 year ago
Lane
Lane, JD, CFP, MBA, CRPS
Category: Tax
Satisfied Customers: 12,867
Experience: Law Degree, specialization in Tax Law and Corporate Law, CFP and MBA, Providing Financial & Tax advice since 1986
Verified

Hi,

...

I have a law degree, with concentration in Tax Law, Estate law & Corporate law, an MBA, with specialization in finance & tax, as well as CFP and CRPS designations. - I’ve been providing financial, Social Security/Medicare, estate, corporate, both for-profit and non-profit, and tax advice on three continents, since 1986.

...

That CRPS stands for Chartered Retirement Plans Specialist. I can help here.

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Can you tell me your source for this ANNUAL limit?

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Just to provide some context - there are two sets of regulations (really three) that a plan must follow to stay in compliance and not have the plan be terminated or frozen or charged penalties (IRS, ERISA, administered by Dept. of Labor, and the PLan's governing document, which is really a subset/application of the ERFISA/DOL rules).

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The 50,000 limit on qualified plan loans (This is an IRS limit) is a cumulative balance of the loan requirement NOT an annual lon requirement.

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You can read more about that here: https://www.irs.gov/retirement-plans/plan-participant-employee/retirement-topics-loans

...

However, the plan itself, in the plan document could ALSO impose an annual per employee limit.

...

But the 50,000 IRS limitation alone wouldn't hurt you here, as you have lowered your outstanding balance by repaying the amounts into the plan.

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Now, MANY plans (a very conventional plan document provision) will not allow additional loans for 6 months after a loan is made ... This (or the many other provisions that could be in your plan document) are ore likely the issue.

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HOWEVER, it is ALSO possible that someone on the front lines in your HR dept or that plans administrator is interpreting the requirement(s) incorrectly. (Wouldn't be the first time, in my experience)

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Can you tell me why/from what source you believe that you cannot still make a 50,000 loan?

...

I'll be here

...

Lane

..

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Customer reply replied 1 year ago
Lane,Thank you for the initial response.My employer's plan is administered by Principal. From the Principal website, we requested both loans - the first for $35,000 (wrong term - 5 months) - which I immediately deposited and repaid - the second for $13,000 (wrong amount) - which I immediately deposited and repaid. These were both refunded once I found-out there were problems with the term and amount.When I requested my 3rd loan (for the correct amount and term - $40,000 and 8 years) I received confirmation that full values of the other checks were received and redeposited in the 401K account, but I was limited by the loan request form to $2,000. I called Principal and they indicated I would only be able to withdraw a maximum of $50,000 over a 12-month period - regardless of the payback. They referred me to IRS regulations which govern 401K loans and said their hands were tied due to the IRS regulations. I understand the regulation for the most part - but I never actually used the funds. This is why I'm asking about an appeals process. I hope this helps to fill-in some of the detail you're looking for.Please let me know if there's any other information you need from me.
Regards,
Peter
Tax Professional: Lane, JD, CFP, MBA, CRPS replied 1 year ago

It does ... in part ... but as I mentioned before , there IS NO prohibition from IRS on taking loans (in terms of how many or how many per year).

...

the 50,000 limitation, again, is a cumulative number .. meaning you can't loan out more than 50,000 (or 50%) at ANY time.

...

They're either referring your to IRS regulations which don't exist (as I said this wouldn't be the first time) for a limitation that's actually a part of the plan's governing plan document limitations OR they're completely wrong.

...

If you like I can call for you ... have to do this a LOT for clients ... get to a level that's above the front lines ... and see what's going on.

...

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Customer reply replied 1 year ago
Hello Lane,I spoke with Principal yesterday and they're standing firm on the fact that $50K is the 12-month limit - regardless of repayment. Are you sure they're in the wrong? What are our options for recourse? I need a quick answer so I can get the funds towards a down payment on a house. Do you think we could get them to change course in the next 72 hours? If not, I need to know fairly soon. Thanks again for your guidance. - Pete
Tax Professional: Lane, JD, CFP, MBA, CRPS replied 1 year ago

This is likely a plan constraint ... When the plan document only allows for a given amount per year, it then becomes becomes a legal issue if they go outside the plan's provisions.

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Customer reply replied 1 year ago
I think we're getting caught-up on the $50K / 50% issue. My main concern - maybe I wasn't clear to begin with - is that despite me taking $48K in two (2) loans from my plan provider, they were both paid-off (back to Principal) on the day they were cashed. I didn't use them. Is there no recourse for me to dispute the use of the funds??I feel that however the law is written, the loan funds were never used, so I should be able to take a loan and use the funds from my own plan. That's the fundamental issue in my mind - regardless of limits.
Tax Professional: Lane, JD, CFP, MBA, CRPS replied 1 year ago

Not if the plan document establishes a 50,000 per year loan limit ... As I said early on, the 50k/50% rule is tax law ... the most that can be loaned out at any one time ... said differently, the outstanding balance of of the loan cannot be more that 50,000 or 50%.

...

What's likely getting you here is the plan''s "governing plan document," which they must make available upon request.

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With principal, it's probably available on line somewhere for you.

...

If the plan document says no more than 50,000 per year can be loaned, your paying them back in the same year (although relevant to the 50/50 rule) is not relevant to these other provisions that govern the plan.

...

The plan itself can always be more restrictive than the IRS DOL rules, as long as it doesn't cross other prohibited lines (such as non discrimination testing or the 50/50 rule).

...

If you can get the plan document to me (not the summary plan document, but the actual plan document (likely to be 40 to 80 pages), I'd be glad to review.

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Tax Professional: Lane, JD, CFP, MBA, CRPS replied 1 year ago

Hi,

...

I’m just checking back in to see how things are going.

...

Did my answer help?

...

Let me know…

...

Thanks

Lane

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Tax Professional: Lane, JD, CFP, MBA, CRPS replied 1 year ago

Hi Peter,

..

Were you able to get the plan doc?

..

If so, I can verify thet theplan itself doesn't allow, which would then mean that you CAN access.
...

Would also be glad to talk to The administrator for you

...

Let me know

...

Lane

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Customer reply replied 1 year ago
Lane,
Based-on my repeated conversations with Principal using your advice, I still don't hold-out a lot of hope to get this done, but here is the program document (attached). They've obviously modified the IRS program with their own twist.Pete
Tax Professional: Lane, JD, CFP, MBA, CRPS replied 1 year ago

I'll take a look - but again the IRS rules say nothing about how often a loan can be taken ..,. it's about the amount outstanding.

...

However, as I mentioned early on, the plan is governed by three regulators, 1. (Federal tax law - IRS administers), 2. (ERISA - Labor Law, DOL administers) and 3. (the plan document itself - plan administrator administers against that document).

...

If they keep saying IRS, they're passing the buck.

...

Give me a bit

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Tax Professional: Lane, JD, CFP, MBA, CRPS replied 1 year ago

Peter ... this is some loan policy flyer that they've published, but is NOT the plan document. (Again, the governing document of the plan).

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HOWEVER, I see that this little flyer DOES make that limiting statement.

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There IS language that re-states the IRS rule (50,000 or 50%) - but they add TO the IRS rule by stating it this way: (notice what I'm underlining)

...

"The maximum amount that may be borrowed is the lesser of (a) or (b):
(a) $50,000 reduced by the highest outstanding loan balance of loans during the
one-year period ending on the day before the new loan is made or
(b) One-half of the Participant’s Vested Account."

...

...

But again, the only way to pin this down FOR SURE is to see if there is a provision in the loan section of the plan document that says you can only take one per year, regardless of any outstanding balance.

...

Remember two things:

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(1) "Plan Document" is a very specific ERISA terminology ... Every qualified plan must have one, and it must be disclosed to participants. This "loan policy" flyer IS NOT the plan document.

..

(2) This little flyer COULD be interpreting that rule incorrectly.

...

A statement that would correctly state the rule would say this (I'm going to re-paste what the flyer says and then write the IRS rule, in similar wording - note the difference in wording from what I've pasted above and what I'm about to say here).

...

"The maximum amount that may be borrowed is the lesser of (a) or (b):
(a) $50,000 reduced by the highest outstanding loan balance of loans during the
one-year period ending on the day before the new loan is made or
(b) One-half of the Participant’s Vested Account."

...

Now here's what the law says:

...

"The maximum amount that may be borrowed is the lesser of (a) or (b):
(a) $50,000 reduced by the highest CURRENTLY outstanding loan balance of loans during the
one-year period ending on the day before the new loan is made or
(b) One-half of the Participant’s Vested Account."

...

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Tax Professional: Lane, JD, CFP, MBA, CRPS replied 1 year ago

So again, there are two possibilities:

...

(1) The little 2 page flyer is incorrectly stating what's in the plan document (if's what's in the plan document doesn't limit loan eligibility any more than the IRS rule), OR

...

(2) The plan was written to be more limiting THAN the IRS rule, as a way of erring on the conservative side and never letting an auditor see, event the possibility of, an excess loan.

...

Only the PLAN DOCUMENT can answer that question.

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Tax Professional: Lane, JD, CFP, MBA, CRPS replied 1 year ago

Nope gotta backpedal here ... Was just looking at the law ... and the previous year balance does come into play, regardless of having paid it off.

...

See this from IRS:

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A participant may have more than one outstanding loan from the plan at a time. However, any new loan, when added to the outstanding balance of all of the participant’s loans from the plan, cannot be more than the plan maximum amount. In determining the plan maximum amount in that case, the $50,000 is reduced by the difference between the highest outstanding balance of all of the participant’s loans during the 12-month period ending on the day before the new loan and the outstanding balance of the participant’s loans from the plan on the date of the new loan.

...

For example, assume Participant A has a vested account balance of $100,000 and took a plan loan of $40,000 on January 1, 2005, to be paid in 20 quarterly installments of $2,491. On January 1, 2006, when the outstanding balance is $33,322, Participant A wants to take another plan loan. The difference between the highest outstanding loan balance for the preceding year ($40,000) and the outstanding balance on the day of the loan ($33,322) is $6,678. Since the new loan plus the outstanding loan cannot be more than $43,322 ($50,000 - $6,678), the maximum amount that the new loan can be is $10,000 ($43,322 - $33,322).

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I learned something today ... in all of my 30 years, I've never had someone take one, pay it of that rapidly, and then turn around and borrow again in such a short time frame.

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The highest outstanding balance in the previous year is what this all turns on.

...

Sorry for getting your hopes up

...

They're spot on

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Tax Professional: Lane, JD, CFP, MBA, CRPS replied 1 year ago

.

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Tax Professional: Lane, JD, CFP, MBA, CRPS replied 1 year ago

Hopefully, at least I've helped you get to some certainly on the issue

...

If this HAS helped, and you DON’T have other questions … I'd appreciate a positive rating (using the faces or stars on your screen, and then clicking “submit")

JustAnswer will not credit me for the work unless you do.

...

Thank you!

Lane

I have a law degree, (Juris Doctorate), with concentration in Tax Law, Estate law & Corporate law, an MBA, with specialization in financial accounting & tax, a BBA, and CFP & CRPS designations, as well - I’ve been providing financial, Social Security/Medicare, estate, corporate, non-profit, and tax advice, since 1986

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