Unit 5: Participant Loans Flashcards
What are the four advantages to use a 401k loan?
Tax free access to funds for Participant
No lengthy application
Convenient repayment through payroll withholdings
Loan interest is paid to self
What are the three negatives of offering 401k loans to employees?
Negative tax consequences if not repaid
Leakage of assets if not repaid
Added administrative complexity to the plan
What are the three types of plans that can permit loans?
Qualified plans under IRC 401a
403a annuity plans and 403B tax shelter to annuity plans
Governmental plans
What is the loan limit for a participant?
50% of their vested account balance up to $50,000
If a loan was present in the last 12 months how is the loan availability calculated?
The $50,000 limit is reduced by the repay loan amount that occurred in the last 12 months
What are the six steps for determining loan availability?
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
If an employee takes a Distribution after a loan has been issued does this recalculate the loan terms?
It does not
The law allows plans to set a minimum loan amount true or False?
True the minimum can be no more than $1000
Can loan repayments be greater than five years?
Only for primary residence
How often must loan repayments be made
At least quarterly
Are principal and interest allowed to be substantially different?
No they must be substantially level
When does the repayment period begin for a participants loan?
When the Participant receives funds
Is it required by law that loans be repaid by payroll withholding
It is not, but most plans require it.
Periodically the IRS will extend loan repayment terms due to natural disasters true or false?
True
What are the two exceptions to loan repayment?
Leave of absence or military leave
How long is a leave of absence repayment suspension good, for a 401(k) loan, under what two conditions?
12 months;
IF the Leave of absence is without pay, OR
if the rate of pay is less than the loan repayment amount
What are the three criteria for a loan repayment exception based on a leave of absence?
1) Term
2) Interest
3) Reamoratization?
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
What are the three conditions of a military leave of absence exception for a loan repayment?
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%
When refinancing a loan what items can be adjusted?
Interest rate, loan repayment period
When refinancing your 401(k) loan are you able to extend the term of the loan repayments beyond the maximum loan period?
You are not
What is the prime rate as it refers to 401(k) loans?
The primary is the interest rate that banks charge their most credit worthy customers.
The prime rate is the lowest rate that money can be borrowed at commercially true or false?
True
Refinancing does not have to be written into a plan designed you allow for it?
False. Refinancing must be written into the plan design if it is to be used.
When a loan is refinanced, which rate is used? The original rate? A Blended Rate? Or the Replacement Loan Rate?
The Replacement Loan Rate
