RECORD A PARTICIPANT LOAN

These two forms can be used to record a loan made by the Solo 401(k) to a participant.  A loan application is provided, and also a promissory note.  These forms are kept by the Trustee of the plan as an internal record formalizing the loan.

Download Loan Application Form
Download Promissory Note Form

IMPORTANT COVID-19 INFORMATION

The relief provided by the CARES Act to 401(k)s participant loans ended December 31, 2020.  Congress DID NOT extend relief to 2021.

Things to consider:

• The loan cannot exceed 50% of the value of your 401(k), or $50,000.  The value of your plan consists of all the plan’s assets, not just cash.

• The term of the loan cannot exceed 5 years, unless 100% of the loan proceeds are used to purchase your primary residence, in which case the term cannot exceed 15 years.

• Payments can be made quarterly or monthly

• Payments must be amortized payments, so interest-only payments are not permitted.

• The interest rate can be set between a low and a high rate.  The low rate is CD rate plus 2%, while the high rate is the prime rate plus 1%.  Either the high or low, or anywhere in between.

• The loan cannot be for less than $1,000

• You cannot have more than 5 loans from the 401(k) at any given time.

IMPORTANT: when calculating your maximum loan amount, remember that the 50% rule applies only to your funds/assets in the 401(k).  If you are the only participant of the plan, this isn’t important, but if your spouse or business partner also participates in the plan with you, you must calculate your loan maximum from your 401(k) funds.

EXAMPLE

John and his wife Susan, own a nut farm in Virginia.  They both participate in their Solo 401(k).  Between rollovers and contributions into the plan, John has $70,000 in the 401(k), while Susan has $120,000 in the 401(k).

If John were to take a loan from the plan, he needs to figure his maximum loan amount off of his $70,000.  He would not look at the full value of the 401(k), because not all of the money in the plan is his.  In this scenario, John’s maximum loan amount would be $35,000 (50% of the value of his 401k).