Unit 5: Participant Loans

Question 1

What are the four advantages to use a 401k loan?

Answer 1

Tax free access to funds for Participant

No lengthy application

Convenient repayment through payroll withholdings

Loan interest is paid to self

Question 2

What are the three negatives of offering 401k loans to employees?

Answer 2

Negative tax consequences if not repaid

Leakage of assets if not repaid

Added administrative complexity to the plan

Question 3

What are the three types of plans that can permit loans?

Answer 3

Qualified plans under IRC 401a

403a annuity plans and 403B tax shelter to annuity plans

Governmental plans

Question 4

What is the loan limit for a participant?

Answer 4

50% of their vested account balance up to $50,000

Question 5

If a loan was present in the last 12 months how is the loan availability calculated?

Answer 5

The $50,000 limit is reduced by the repay loan amount that occurred in the last 12 months

Question 6

What are the six steps for determining loan availability?

Answer 6

One: determine vested account balance

Two: multiply that by 50%

Three: determine $50,000 minus any amounts repaid to a previous loan and the prior 12 months

Four: Determine the lesser of 50% of the vested balance or $50k minus loan repayments

Five: subtract the current balance of any outstanding loans

Six: Subtract the outstanding loan amounts from the available loan balance this will calculate the final amount

Question 7

If an employee takes a Distribution after a loan has been issued does this recalculate the loan terms?

Answer 7

It does not

Question 8

The law allows plans to set a minimum loan amount true or False?

Answer 8

True the minimum can be no more than $1000

Question 9

Can loan repayments be greater than five years?

Answer 9

Only for primary residence

Question 10

How often must loan repayments be made

Answer 10

At least quarterly

Question 11

Are principal and interest allowed to be substantially different?

Answer 11

No they must be substantially level

Question 12

When does the repayment period begin for a participants loan?

Answer 12

When the Participant receives funds

Question 13

Is it required by law that loans be repaid by payroll withholding

Answer 13

It is not, but most plans require it.

Question 14

Periodically the IRS will extend loan repayment terms due to natural disasters true or false?

Answer 14

True

Question 15

What are the two exceptions to loan repayment?

Answer 15

Leave of absence or military leave

Question 16

How long is a leave of absence repayment suspension good, for a 401(k) loan, under what two conditions?

Answer 16

12 months;
IF the Leave of absence is without pay, OR
if the rate of pay is less than the loan repayment amount

Question 17

What are the three criteria for a loan repayment exception based on a leave of absence?
1) Term
2) Interest
3) Reamoratization?

Answer 17

One: suspension cannot exceed 60 month maximum loan repayment

Two: interest still accrues

Three: when Participant returns remaining P/I may be reamortized OR P/I not paid during absence can be paid at any time

Question 18

What are the three conditions of a military leave of absence exception for a loan repayment?

Answer 18

One: loan. Can extend for the period of the participants military leave

Two: interest still accrues

Three: if interest rates were above 6% Participant can request they be capped at 6%

Question 19

When refinancing a loan what items can be adjusted?

Answer 19

Interest rate, loan repayment period

Question 20

When refinancing your 401(k) loan are you able to extend the term of the loan repayments beyond the maximum loan period?

Answer 20

You are not

Question 21

What is the prime rate as it refers to 401(k) loans?

Answer 21

The primary is the interest rate that banks charge their most credit worthy customers.

Question 22

The prime rate is the lowest rate that money can be borrowed at commercially true or false?

Answer 22

True

Question 23

Refinancing does not have to be written into a plan designed you allow for it?

Answer 23

False. Refinancing must be written into the plan design if it is to be used.

Question 24

When a loan is refinanced, which rate is used? The original rate? A Blended Rate? Or the Replacement Loan Rate?

Answer 24

The Replacement Loan Rate