4067 / Is there a dollar limit on the amount that a participant can borrow under a tax sheltered annuity and avoid the loan being treated as a taxable distribution?
Editor’s Note: The CARES Act increased the available loan amounts to $100,000 or 100 percent of the employee’s account balance for 2020.
Loans made after 1986 are taxable as distributions from a plan to the extent the amount of the loan, when added to the outstanding balance of all other loans, whenever made, from all tax sheltered annuities, IRC Section 457 deferred compensation plans, and qualified pension, profit sharing, stock bonus, and bond purchase plans of the employer, exceeds the lesser of the following: (1) $50,000, reduced by the excess of the highest outstanding balance of loans from the plans during the one year period ending on the day before the date the loan is made over the outstanding balance of loans from the plans on the date the loan is made, or (2) one-half of the present value of the employee’s nonforfeitable accrued benefit under the plans, of at least $10,000.1
Loans subject to the above dollar limits are those that by their terms require repayment within five years or, if they are “principal residence” loans, within a reasonable time and that satisfy the substantially level amortization requirement and the enforceable agreement requirement. All plans of all other members of a controlled group of employers, of an affiliated service group, or businesses under common control are counted as plans of the employer.2