3963 / What miscellaneous rules apply to loans from a qualified plan?

Both direct and indirect loans are considered loans. A participant’s or beneficiary’s assignment, agreement to assign, pledge, or agreement to pledge any portion of his or her interest in the plan is considered to be a loan of that portion. If a participant’s interest in a plan is pledged or assigned as security for a loan, only the amount of the loan, not the amount assigned or pledged, is treated as a loan.¹

Any amount received as a loan under a contract purchased under a plan, and any assignment or pledge with respect to such a contract, is treated as a loan under the plan.² This would appear to treat a policy loan by a trustee as a loan to the participant. If a premium that is otherwise in default is paid in the form of a loan against the contract, the loan is not considered made to the participant unless the contract has been distributed to the participant.³

The IRS has stated, in a general information letter, that where plan participants received mortgage loans from a bank that were contingent on the plan making deposits equal to the loan amounts, the loans were indirect plan loans for purposes of IRC Section 72(p).⁴

A loan received by a beneficiary is treated as received by the participant if he or she is alive at the time the loan is treated as a distribution.⁵