Loan Overview

Plan loans may be made available to 403(b) plan participants, using their retirement account as collateral for the loan, as long as they are permitted by the terms of the retirement plan (and the funding vehicle used to fund the plan), and certain legal requirements imposed under IRC Section 72(p) are satisfied.

Under IRC Section 72(p), a loan from an employer plan (including a 403(b) plan) to a participant or beneficiary is treated as a distribution for purposes of taxation under IRC Section 72. However, a loan from a retirement plan (including a 403(b) plan) to a participant will not be treated as a distribution if the loan satisfies certain requirements, including:

  1. The loan has to be repaid over not more than five years (unless used for the purchase of a principal residence).
  2. The loan has to be paid in substantially level installments that include principal and interest, no less often than quarterly.
  3. The loan does not exceed the lesser of:
    1. $50,000 per plan (from all vendors combined), reduced to the extent that the participant’s highest balance for plan loans outstanding during the preceding 12 months exceeds the current balance for plan loans; or
    2. 50% of the participant’s nonforfeitable benefit (or $10,000 if greater).

These limits apply by treating all loans from all plans of the employer as one loan.

If the loan repayments are not made in a timely manner, the outstanding loan balance (plus interest) will be put into default. This defaulted amount is deemed by the IRS to be a taxable distribution of retirement plan assets at that time and may also be subject to tax penalties on early withdrawals.

Responsibilities for loan administration: The final regulations provide that the written plan should coordinate the responsibilities of the employer and the vendors issuing the contracts under the plan. For plan loans that are made by the vendor under the terms of the 403(b) annuity contract, employers will be required to provide the vendor with adequate information to allow for the proper administration of the loans. The final regulations make it clear that it will be inappropriate for the employer to allocate this responsibility to employees as the employees lack the necessary expertise and further may have an inappropriate self-interest in the transaction. Formerly, plans may have allowed participants to self-certify their eligibility for loans. So if you currently let employees determine whether they are eligible for a plan loan, you will need to adopt new administrative procedure.

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© 2014 and prior years, Teachers Insurance and Annuity Association - College Retirement Equities Fund (TIAA-CREF), New York, NY 10017