IRS Provides Clarity on Auditing Maximum Loan Amount
Plan sponsors and administrators got some good news on April 20 from the IRS regarding the calculation of maximum participant loan amounts.
There are several limitations imposed with regard to participant loans, including one that the total amount of the loan(s) outstanding cannot exceed $50,000 in the course of a year. The IRS memorandum
notes that this $50,000 is reduced by the highest outstanding balance of loans during the 1-year period ending the day before the second loan, in turn reduced by the outstanding balance on the date of the second loan.
The reason for this adjustment was to “prevent an employee from effectively maintaining a permanent outstanding $50,000 loan balance.”
In a Memorandum for Employee Plans (EP) Examinations employees, the IRS outlines the methodology that it expects its examinations staff to use in computing the maximum participant loan amount.
The IRS cites as an example a situation where a participant borrows $30,000 in February which was fully repaid in April, and $20,000 in May which was fully repaid in July, before applying for a third loan in December. Here the IRS says that the plan may determine that no further loan would be available, since $30,000 + $20,000 = $50,000. Alternatively, the IRS notes that the plan may identify “the highest outstanding balance” as $30,000, and permit the third loan in the amount of $20,000, acknowledging that, “at this time, the law does not preclude either computation of the highest outstanding loan balance in the above example.”
The IRS instructs its agents that if during an examination they determine that a qualified plan made two or more loans to the same participant during a 1-year period, they are to determine whether the plan has computed “the highest outstanding balance” in one of the two ways described in the example. If it has, the IRS says the “requirement under section IRC §72(p)(2)(A) is met and no further inquiry need be done.”