If a participant has a vested account balance of $12,000, may he take a $10,000 participant loan?
Rev. 06/26/09; E-mail Alert 2009-9

Yes, this is an exception to the 50% vested account balance rule. However, this is only available if permitted under the provisions of the plan. Further, although a participant loan of 100% of the vested account balance up to $10,000 is permitted, the amount of the loan in excess of 50% of the vested account balance must be secured by actual collateral to be provided by the participant, not the vested account balance. The additional collateral is required from the participant in order for the participant loan to be considered a prohibited transaction exemption.

Due to the administrative challenges involved with dealing with outside collateral, most plans limit participants to using the 50% of their vested balance.

For more on participant loans, click here for information and/or to register for our eSeminar on participant loans.