Question

Chapter 7 - Question 8 :

Please help me to explain this question. Thank you

BJ has a vested account balance in his employer-sponsored qualified money purchase pension plan of $60,000. He has two years of service with his employer and the plan follows the least generous graduated vesting schedule permitted under PPA 2006. If BJ has an outstanding loan balance within the prior 12 months of $15,000, what is the maximum loan BJ could take from this qualified plan, assuming the plan permitted loans?

A.            $15,000

B.            $30,000

C.            $35,000

D.            $50,000

Answer 1

Answer is $15,000 (which is Option A)

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Explanation:

As per the applicable rules, the value of maximum loan that can be taken would be lesser of the following:

1) $50,000.

or

2) 50% of Vested Account Balance which would be equal to $30,000 (60,000*50%).

Since, BJ has an outstanding loan balance within the prior 12 months of $15,000, the maximum amount of loan that can be availed will be reduced with amount of outstanding loan.

Therefore, the maximum loan BJ could take from this qualified plan, assuming the plan permitted loans would be $15,000 (30,000 - 15,000).

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Notes:

The vested account balance is 20% of $300,000 [20%*300,000 = $60,000]. The 20% rate is determined with the use of 2 to 6 year vesting schedule. As BJ has 2 years of service with the present employer, we will take 20% as the basis to calculate vested account balance.