The IRS just issued a memo to its auditors approving two different methods for calculating the statutory limitation on available loan amounts when a participant takes a new loan within 12 months of having paid off another loan or is obtaining a new loan with an other loan outstanding. In addition to verifying your recordkeeper is properly utilizing one of the two approved methods, it is also a great time for an overall plan loan check-up. Why? Because both IRS and DOL auditors will review a plan’s outstanding loans during plan audits.

Here are some things to review:

• Documentation. If the government audits your plan, you need to produce copies of promissory notes, amortization schedules, payment history, and year-end plan loan balances for all plan loans. Obtain documents for either all or a sample of outstanding plan loans. Make sure you understand whether certain documents, such as amortization schedules, remain available only for a short period of time on the recordkeeping platform, and if so, consider printing those out on a routine basis to keep in your plan records.

• Plan Loan Reconciliation. Check a sample or all of your plan loans to confirm that the terms are consistent with the plan’s loan policy, that payment history tracks your plan loan remittance records, and that the year-end plan loan balance can be reconciled to the amortization schedule for that plan loan. If you find discrepancies, you will need to determine why they exist.

• Calculation of Maximum Plan Loan Amount. By statute, a plan loan may not exceed the lesser of:

(i) $50,000, reduced by any excess of

(I) The highest outstanding balance of loans during the 1-year period ending on the day before the date on which such loan was made, over (II) the outstanding balance of loans on the date on which such loan was made; or

(ii) the greater of

(I) half of the present value of the vested accrued benefit, or (II) $10,000.

Note that calculation of the limitation under the first prong of (i) above can come into play even for plans that only allow one plan loan to be outstanding at any time. The IRS memo to its auditors provides instruction on two alternative ways to calculate the first prong of the limitation above: 

For example, a participant borrowed $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. The plan may determine that no further loan would be available, since $30,000 + $20,000 = $50,000. Alternatively, the plan may identify “the highest outstanding balance” during the 1-year period as $30,000, and permit the third loan in the amount of $20,000.

You will want to verify that your recordkeeper is applying one of the two above-referenced calculations in determining the maximum available loan amount.

If your plan loan check-up finds everything is order, congratulations! Keep a record of your diligence and the results. If you find an error, remember, errors in administering plan loans are common enough that the IRS and DOL have standard correction procedures for correcting plan loans under their voluntary compliance programs. As always, we recommend that plan sponsors consult with employee benefits legal or tax counsel when plan errors are detected.