Effective, April 1, 2021, every Money Purchase Plan and Trust (MPP&T) participant will be permitted to have a maximum of two outstanding loans at any one time. Pursuant to Internal Revenue Service (IRS) regulations, the combined total of any outstanding loans cannot exceed the lessor of: half of the balance of the participants account balance; or $50,000.00.

If I defaulted on a loan previously, will I be able to obtain a second loan?

Perhaps. The IRS rules state that the amount of any new loan request, when added to the outstanding balance of all the participant’s loans from the plan, cannot be more than the IRS permitted maximum of $50,000.00. To determine the maximum amount available to the participant, the IRS requires the Plan to take the maximum allowable limit (again, the lessor of half of the participants balance or $50,000) and reduce that by the difference between the highest outstanding balance of all of the participant’s loans during the 12-month period ending on the day before the new loan and the outstanding balance of the participant’s loans from the plan on the date of the new loan.

For example: Participant A has a vested account balance of $100,000. On April 1, 2019, she takes a five-year loan from her MPP&T account in the amount of $30,000. For the reason that she fails to make any payment, her loan goes into default and she has to declare $30,000.00 as earned income on her taxes in the year that she defaulted.

After reading about this new second loan provision, she applies for a second loan on April 15th, 2021. To calculate the amount available to her, the Plan sponsor must take the difference between the highest outstanding balance for the preceding year, which for this example will be $31,329.98 ($30,000 + $1,329.98 in interest) and the outstanding balance (principal and interest) owed at the time of application, which we are saying is $32,295.09. That difference amounts to $965.11. Since the new loan plus the outstanding loan cannot be more than $49,034.89 ($50,000.00 - $965.11), the maximum amount that the new loan can be is $17,704.91. ($49,034.09 - $31,329.98.)

Confused? More of a literarian than a mathematician? Well, allow us to break it down for you. What the IRS code and subsequent example reveal is that a participant who applies for a second loan but has defaulted on a loan previously will always be caught between the past and the present, and at the time of the second loan application, will carry the burden of both. It kind of makes you wonder if F. Scott Fitzgerald had a twin and the twin worked for the I.R.S. writing Internal Revenue Code provision.

If you defaulted on a previous loan and want to know if you have any availability to borrow some money under the new second loan provision, please call Vanguard at 1-800-523-1188. You may find that you have a second act after all.