Participant Loans and Hardships

Question 1

The minimum loan value for a participant loan from an ERISA 403(b) plan cannot be greater than 1,000
True
False

Answer 1

True
ERISA plan can impose a minimum loan amount provided it does not exceed 1,000 to ensure that loans satisfy the DOL requirement that loans be available on a reasonably equivalent basis to all participants. This is an ERISA requirement it does not apply to non ERISA 403 (b) plans

Question 2

Which one of the following would qualify for a hardship withdrawal under the IRS safe harbor reasons?
a. expenses for the repair of a participant’s car which is the participant’s primary form of transportation
b. expenses for the next semester of college for a participant’s child
c. medical expenses for the participant’s nephew who is not a dependent of the participant
d. expenses for the repair of the participant’s vacation home

Answer 2

Expenses for the next semester of college for a participant’s child

This is one of the safe harbor events for a hardship

Question 3

On 1/1/2023 Augusta wants to take a new loan on her 403(b) account. Determine the maximum amount available
*Augusta is not a ph in another employer plan
*Plan allows for multiple loans per participant
* Augusta has one loan outstanding
* Vested account balance 125,000
* Highest loan balance within the last 12 months 30,000
* Current loan balance is 25,000

Answer 3

20,000
Account balance is 125,000 so max loan amount is 50,000 REDUCED by the DIFFERENCE between the HIGHEST outstanding loan balance in the last 12 months - CURRENT loan balance. 30,000-25,000 = 5,000. Maximum of all loans cannot exceed 45,000 instead of 50,000. Current outstanding loan is 25,000 so maximum new loan amount is 20,000

Question 4

ERISA requires that the interest charged for loans from a 403(b) plan be based on the Prime Rate
True
False

Answer 4

False
IRC 72(p) does not discuss how much interest should be charged for a loan. However in an ERISA 403(b) plan, the interest charged must be a reasonable or prevailing rate. The DOL does not require that the interest rate be based on the Prime rate, but it is common to charge interest equal to P+1 or 2%

Question 5

Loans must be made monthly with principal and interest amortized over a 5 year period or longer if the loan is for the purchase of a participant’s principal residence
True
False

Answer 5

False
Loan repayments must be made at least quarterly with principal and interest amortized over a 5 year period, or longer if the loan is for purchase of the participant’s principal residence

Question 6

Which of the following statements regarding loans from a 403 (b) plan is true?
a. Loans made to purchase a principal residence the payment period is extended to 10 years
b. loans can only be taken when accompanied by a qualified event
c. A participant loan from a 403 (b) must be permitted by both the plan and the annuity contract or custodial account
d. A participant may borrow any amount up to their vested account balance

Answer 6

A participant loan from a 403(b)

Both the plan and annuity contract or custodial account must permit loans. A participant may borrow up to 10,000 or 50% of their vested account balance for any reason. Loans do not require a qualifying event. For loans to purchase a principal residence, the IRC allows the repayment period to be longer than 5 years and it does not state a maximum period