A participant in a 401(k) plan has a vested account balance of $120,000 and an outstanding plan loan of $5,000. Under IRC §72(p), the MAXIMUM additional loan this participant may take WITHOUT the loan being treated as a taxable distribution is generally:

Explanation

Under IRC §72(p)(2), a qualified-plan loan is not treated as a taxable distribution only if it satisfies dollar limits, a 5-year repayment requirement (longer for primary-home loans), and level amortization rules. The DOLLAR limit is the LESSER of $50,000 reduced by the EXCESS of the participant's highest outstanding loan balance during the prior 12 months over the current outstanding balance, or the GREATER of $10,000 or 50% of the participant's vested account balance. Here vested = $120,000 (50% = $60,000) and the highest prior balance is $5,000, so the limit is $50,000 - $5,000 = $45,000, capped by the $60,000 figure (which is larger so does not bind) — the response that works the two-part test to $45,000. The response allowing $60,000 as simply one half of the vested balance ignores the $5,000 already out. The response treating $50,000 as a flat ceiling never reduced by amounts already borrowed ignores the dollar reduction. The response permitting a loan of the full $120,000 vested balance would treat the entire account as withdrawable — incorrect under §72(p).