401k Recovery Advice

Guidelines to Operations

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In Brief...

Pros, Cons and Guidelines, we look at the factors a participant may consider when requesting a loan from his or her qualified-plan account. Prior to the enactment of the Economic Growth and Tax Relief Reconciliation Act of 2001 (EGTRRA), anyone who was at least a 5% owner of a business was not allowed to borrow from that business' plan. A plan participant may borrow up to 50% of his or her vested plan balance or $50,000, whichever is less. Example 1 Employee A has a balance of $60,000 in ABC Company's 401(k) plan, and, of this amount, the vested balance is $30,000. Example 2 Employee B has a balance of $120,000 in ABC Company's 401(k) plan, and this amount is fully vested. Employee B is allowed to borrow up to $50,000 from the plan - even though 50% of $120,000 is $60,000, the maximum dollar amount allowed is $50,000. Example 3 Employee C has a balance of $18,000 in XYZ Company's profit-sharing plan, and employee C may borrow up to $10,000 from the plan. Although $10,000 is more than 50% of employee C's vested balance, the plan allows an exception whereby the participants may borrow up to $10,000. Spousal Consent If plan distributions are subject to certain annuity requirements and the participant is married, his or her spouse may be required to approve the loan if the plan balance is being used as security for the loan. An employer who wants to include a loan provision in the business' qualified plan should consult with a plan administrator to ensure that regulatory requirements are met.

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