Risk Premium versus Intrinsic Value
Course: Investment Planning
Lesson 5: Fundamental Equity Analysis
Student Question:
After reading the following, I’m confused about the amount a participant is allowed to take out as a loan from a qualified plan. Would it be up to $50k of vested account balance or only up to $10k?
Text states: As a general rule, a participant may borrow up to 50% of his or her vested account balance, not to exceed $50,000. However, a participant is permitted under ERISA rules to borrow up to $10,000 if he or she has a vested account balance of at least $10,000.
Instructor Response:
This is best illustrated by example.
Example 1
Serena has a balance in her 401(k) account of $150,000. She is 80% vested. She is vested in $120,000 [calculated as .8 * 150,000]. In accordance with the general rule, she can a take loan of up to the lesser of one-half of her vested balance or $50,000; she can take a loan up to $50,000.
Example 2
Antony has a balance in his 401(k) account of $40,000. He is fully vested. Under the general rule, he can take a loan of up to the lesser of one-half of his vested balance or $50,000; He can take a loan of up to $20,000.
Example 3
Cleo has a balance in her 401(k) account of $10,000. She is fully vested. ERISA would allow her employer to lend her $10,000. This is an exception to the general rule.
