The IRS is scrutinizing retirement plans with participant loan balances. The IRS is concerned that Plans have not been following, or are abusing, the rules for loans from retirement funds. As a result, the Employee Plans Compliance Unit (EPCU) sent out letters to Form 5500-EZ filers identified in their records as having participant loans in excess of $50,000 per participant. The project is intended to ensure sponsors are complying with participant loan limits, and that income tax is paid on excess amounts, and that Plans then correct the underlying procedures allowing this to happen. Failure to comply does carry the risk that the Plan may lose its tax-favored status. Participant loans must meet the following standard requirements:
-
The Plan must allow for participant loans.
-
Loans must have a legally enforceable agreement stating the date of
the loan, the amount, a reasonable interest rate, and the repayment
schedule. The maximum loan amount is 50% of the vested account balance
or $50,000, whichever is less. An exception exists for situations where
the vested account balance is less than $10,000.
- Generally, the participant must make payments at least quarterly of principal and interest.
-
Generally, the loan must be paid back in 5 years or less, however
there are exceptions if the loan is for a main home or if the
participant is performing military service during the 5 year period of
the loan.
