Definition
If the plan document allows, a participant may borrow from the plan without the loan being treated as a taxable distribution, provided it meets IRC section 72(p). The total of the participant's loans generally cannot exceed the lesser of $50,000 (reduced by the highest outstanding balance in the prior 12 months) and the greater of $10,000 or one-half of the vested account. The loan must be repaid within five years, unless used to buy a principal residence, with substantially level payments at least quarterly. A default can be a deemed distribution. On the plan's statements the loan is a note receivable from participants.
Why it matters in an audit or review
Auditors test loan eligibility, approval, and amounts against the plan document and the limits, recompute the balance, test payroll deductions for repayment, and check treatment of defaulted loans. Participant loans also appear in Form 5500 reporting. Loans that do not follow plan terms are an operational failure.
Example
Illustrative: a participant has a vested balance of $70,000 and no prior loans. One-half of the vested balance is $35,000, which is above the $10,000 floor and below the $50,000 cap, so the maximum loan is $35,000.
Common mistakes
- Not tracking the 12-month lookback on prior loan balances.
- Failing to report a defaulted loan as a deemed distribution.
Sources
- IRC section 72(p), loans treated as distributions: https://www.law.cornell.edu/uscode/text/26/72
- FASB ASC 962-310-35, notes receivable from participants (measured at unpaid principal plus accrued interest)
- DOL, Form 5500 instructions: https://www.dol.gov/agencies/ebsa
Definitions paraphrase AICPA and FASB guidance; read the standard itself before relying on a requirement. Example figures are illustrative. This page is guidance, not professional advice. Report an error