Q. If a participant is requesting a loan for the maximum amount available, should vendor fees (surrender charges) be taken into account from a TPA perspective?
For example, a participant has an accumulation value of $10,000, which were employee contributions (and any gains). According to my understanding of the federal tax code, the participant is 100% vested in those contributions and earnings. Based on 100% vesting of employee contributions the participant would be eligible for 50% of the account balance. Under those circumstances, is it correct that if we approve a loan request of $5,000 we will be in compliance?
If in the same scenario, the participant has $10,000, the vendor has imposed surrender charges and has provided a cash surrender value of $9,000. Would we still be able to approve the request for $5,000, or would we have to lower the amount to $4,500 based on the vendor fee calculation and the vendor determination of the maximum loan amount available?
A. Federal tax code Section 72(p) permits the greater of $10,000 or 50% of the account to be borrowed; however, it is the rare provider that would permit 100% of the value to be borrowed since they want to retain enough for surrender charges in the event of loan default. Check their specific loan provision, which will apply greater limits on borrowing than would the federal tax code! Then, subject to plan rules, follow the terms of the specific provider’s loan provision.