Solo-K – Loans

One of wonderful benefits of your Solo-K plan is the ability for any plan participant to take a loan from their plan accrued value. Of course, there are pros and cons as to whether a participant should take a loan from the plan, but the fact remains is that your PGI 401(k) plan will have this feature.

While some plan document sponsors will require you to complete a form, this is not necessary. As Trustee of your Solo-K and the participant in the plan, you will have the necessary tools right at your fingers to apply for, process and deposit the loan into your personal account. Remember, this is a participant loan to you! As such, you can execute this transaction as the Trustee and participant of the plan.

How Much Can I Borrow?

  1. The available amount of the loan is based on the participant’s account balance (example: in a spouse/spouse owned business, each participant’s ability to borrow funds is not based on the overall 401(k) plan balance, rather each participant’s respective account balance).
  2. The participant can borrow up to $50,000 or 50% of their account balance, whichever is less. As an example, a participant with an accured balance of $100,000 could borrow up to, but no more, than $50,000, where another participant with an accrued balance of $80,000, would be limited to a loan not to exceed $40,000.

Duration of Loan and Repayment Schedule?

  1. Unless being used for the first time purchase of a primary residence, the loan is not to exceed 5 years.
  2. Loan repayment must be no less frequent than on a quarterly basis, but can be made more frequently as there are no pre-payment penalties.
  3. Loan repayments are fixed. The loan is repaid based on the principal and interest owed.

Interest Rate for Loan?

While two methods of repaying the loan are permissible, the most used method of repayment on the loan is:

  1. The Prime Interest Rate at the time of the loan, plus 1%. As an example: if the prime was at 3.85% at the time the loan was taken, the participant would need to make a loan repayment of at least 4.85%.

Plan Documents Utilized for the Loan?

  1. While different plan document sponsors may have documents titled differently from each other, the plan participant will complete a loan application and loan promissory note.
  2. The IRS requires the execution of a written, compliant document to establish the terms of the loan, compliant with IRS regulations on its terms and conditions.

Other Tidbits to Keep in Mind!

  1. A participant loan must be repaid by the participant, only. The loan cannot be paid from the business or contributions made to the 401(k) plan.
  2. While you can use the executed loan for any purpose, the loan is to you, the participant. Even if your desired use of the funds will go elsewhere, the loan must be made and deposited into your personal account, not another person or entity.
  3. It is important to remember the loan’s terms for repayment. For example, the loan must be repaid at least on a quarterly basis. You are not permitted to independently determine to repay the loan less frequently (e.g., semi-annual, annual or balloon payment at the conclusion of 5 years).
  4. Repayment is the fixed loan amount plus interest. You cannot stipulate interest-only payments or otherwise vary loan repayment terms that do not comply with IRS regulations.

Whether you ever take a loan from your Solo-K is up to you, the participant. But, your plan should always have the freedom and flexibility to allow a participant to take a loan from the plan.