Department of Labor (DOL) rules require that a plan loan be “adequately secured.” What determines whether a plan loan is adequately secured and when must this determination be made?
Rev. 11/04/04, E-mail Alert 2004-22

A plan loan is adequately secured if the loan amount does not exceed more than 50% of the present value of the participant's vested account balance. The maximum permissible dollar amount for such a plan loan may not exceed $50,000. The determination of whether this standard is satisfied must be made on the date of the loan.

Assuming a plan loan meets the adequate security standard on the date the loan is made, must the remaining 50% vested account balance be kept in the plan? Or may the participant take a subsequent in-service or hardship withdrawal of the remaining value of his or her vested account value?
Rev. 11/04/04, E-mail Alert 2004-22

If the security requirement is met as of the date of the loan, there is no restriction on in-service or hardship withdrawals of the remainder of the account, even as early as the next day. For example, say a participant has a vested account balance of $25,000. The participant takes a participant loan of $12,500 on November 1, 2009. On November 2, 2009, the participant would have a loan note of $12,500 and other assets of $12,500 that may be distributed if there is a distributable event.

However, a plan administrator may want to retain a portion of the account and not make it eligible for distribution to assure proper crediting of interest on the loan in the event of an actual default.

When setting loan policies, the plan administrator may want to segregate the sources of contributions since not all contribution types are eligible for in-service withdrawal before age 59½ (e.g. qualified nonelective, qualified matching, safe harbor contributions).

Bill Grossman, QPA