Final answer:
The maximum loan a participant can take out from a qualified plan under ERISA is the lesser of 50% of their vested benefits or $50,000.
Step-by-step explanation:
Under the Employee Retirement Income Security Act (ERISA), participant loans from qualified retirement plans are subject to specific regulations. The maximum allowable participant loan is generally determined by the lesser of two factors: 50% of the present value of the participant's vested benefit under the plan or a maximum limit of $50,000. This provision ensures a balance between facilitating participant access to their retirement funds and preserving the integrity of the retirement plan.
For example, if a participant's vested benefit is $80,000, the maximum loan they could take out would be $40,000, which is 50% of their vested amount. This illustrates the application of the 50% rule when the participant's vested benefit is less than $100,000.
However, if a participant's vested benefit is $200,000 or more, the loan amount would be capped at the statutory maximum of $50,000. In this scenario, even though 50% of their vested benefit would be $100,000 (which is higher than the $50,000 limit), ERISA places an upper ceiling on participant loans to ensure responsible utilization of retirement funds.
This regulation aims to strike a balance, allowing participants access to their retirement savings while preventing excessive borrowing that could jeopardize their long-term financial security. The specific limits set by ERISA are designed to promote prudent financial planning and safeguard the interests of both participants and the integrity of the retirement plan.