Answer from Michael A. Webb, Vice President, Retirement Plan Services, Cammack LaRhette Consulting
Neither the Code nor ERISA restricts loan frequency; the 12-month restriction is actually an optional provision that your plans have elected (and is pretty common). This optional restriction would not extend to other plans of the employer so as to prevent the loan.
However, before you permit the loan, the maximum amount that the participant may borrow is restricted by the Code and requires all plans of the employer to be treated as one plan for this purpose (IRC 72(p)(2)(D)(ii)).
The maximum amount the employee may borrow is the LESSER of:
- $50,000 minus the highest outstanding loan balance of all loans taken in the last 12 months; or
- 50% of the COMBINED vested account balances of the plans, less the amount of the 401(k) plan loan. Note that Code section 72(p)(2)(A)(ii) permits a participant to borrow up to $10,000, if the plan permits, under this provision, even if it exceeds 50% of the account balance, but ERISA requires that no more than 50% of the participant’s vested account balance be used as collateral for the loan. (There is a provision that would allow for outside collateral, but most plan vendors do not permit outside collateral in our experience, and so many do not apply the $10,000 floor).
The participant should not be permitted to borrow more than the maximum amount as calculated under this formula. Typically, a plan will not allow more than 50% of the account balance to be borrowed even if it would be less than the aggregate permissible loan limit under both plans, and some annuity contracts or custodial account vendors may impose their own restrictions. But if the maximum as calculated under this aggregate formula would be zero, then the participant should not be permitted to borrow at all.
NOTE: This feature is to provide general information only, does not constitute legal advice and cannot be used or substituted for legal or tax advice.