Internal Revenue Code (IRC) Section 72(p)(2) sets the limit on the amount of a participant’s benefit that may be used as a loan and not be considered a taxable loan.  Under IRC Section 72(p)(2), a participant may receive a nontaxable loan that is equal to up 50% of the participant’s vested benefit, not to exceed $50,000. 

However, the $50,000 cap may be reduced if the participant has any had any prior loans.  A reduction would apply if the participant has had an outstanding loan balance during the last 12 months.  If there is an outstanding loan balance during that time, then the $50,000 is reduced by the highest loan balance during the 12-month period.

It is important to note that the plan document is not required to make available the maximum amount allowed under IRC Section 72(p)(2) and could therefore set a lower limit.

Finally, it must be determined what the plan provides in regard to the contribution sources available for a loan.  This information can be found in the Summary Plan Description or in the Loan Procedures.  The plan can restrict participant loans to certain contribution sources or allow a participant loan from all contribution sources.  In addition, the plan document or Loan Procedures may also indicate that if a loan may only be taken from certain accounts, whether or not the IRC limits of the lesser of 50% of the benefit or $50,000 is determined by only considering the available accounts or by taking the entire vested benefit into account.

For more information on determining the maximum loan amount available, please contact your Nyhart consultant.

This article was last updated on January 31, 2012