Employee Benefit Plans: The 411

Valuable Information on 401ks, Pensions, ESOPs, Form 5500 Preparation + More

Reviewing 401k Loan Requests for Compliance

During audits of 401(k) plans, one of the most common internal control deficiencies we communicate to management is when the plan sponsor relies on a third party administrator to make sure that loan requests are in compliance with federal regulations and the plan document.  The plan sponsor always maintains fiduciary responsibility with compliance on loans issued to participants.  It is easy to overlook this responsibility thinking that the third party administrator knows best, however I have personally seen several instances where out of compliance loans had been issued.

As a plan administrator you can create a compliance testing process that will only take a few minutes per loan. Federal regulations require that 401(k) loans comply with the following:

1.    Total borrowings must be 50% or less of the participant’s vested account balance on the date of origination.
2.    Total borrowings cannot exceed $50,000.  This limit includes all cumulative loans outstanding for the participant.  This also includes loans from other plans of the same employer or related employers.
3.    The loan must be repaid in 5 years or less, unless the loan is used for the purchase of the participant’s main home.
4.    The loan payments must be made at least quarterly and the payment amount must be substantially level over the life of the loan.

In addition to testing that each loan is in compliance with the regulations listed above, any additional rules set forth in the plan document should also be tested for each loan.  For example, some plans only allow one outstanding loan at a time even though federal regulations permit multiple loans.  Frequently when the third party administrator issues loans that are not compliant with the plan document it is due to these plan specific restrictions.

Investing a little time in developing these controls and following through with them can save on costly errors and infractions. If you need any additional advice on internal controls for plan administration, we are here as a resource for you.

Rex Platt, CPA


  1. brad d warren, cpa says:

    Very informative article, on 401(k) loans, and loan testing, and fiduciary responsibilities.