IRS rules generally prohibit lenders from using stock held in a 401(k) plan as loan collateral, since such plans are prohibited from allowing benefits provided under the plan from being assigned or alienated. However, such stocks may serve as loan collateral for a 401(k) participant loan, if made for certain purposes, through the participant’s employer.

If your bank’s 401(k) plan allows bank employees to take out participant loans, the IRS limits the amount of such loans as a percentage of the “present value” of the participant’s vested account balance (except in cases of a vested plan balance of less than $10,000), as explained in the resources linked to below.

For resources related to our guidance, please see:

• Department of Labor, FAQs about Retirement Plans and ERISA, page 15 (“In general, your retirement plan is safe from claims by other people. Creditors to whom you owe money cannot make a claim against funds that you have in a retirement plan. For example, if you leave your employer and transfer your 401(k) account into an individual retirement account (IRA), creditors generally cannot get access to those IRA funds even if you declare bankruptcy.”)

• ERISA, 29 USC 1056(d)(1) (“Each pension plan shall provide that benefits provided under the plan may not be assigned or alienated.”)

• IRS, A Guide to Common Qualified Plan Requirements (“Check that, other than for participant loans permitted under the terms of your plan, no benefits under the plan were used as collateral for a loan or otherwise assigned or alienated. The plan must provide that benefits provided under the plan may not be assigned or alienated. In practice, the plan must not allow the assignment or alienation of any employee’s interest in the plan, other than for certain participant loans if they are provided for under the plan terms, and for certain qualified domestic relations orders.”)

• IRS, Issue Snapshot – Borrowing Limits for Participants with Multiple Plan Loans (“A qualified retirement plan may, but is not required to, provide for loans. If a plan provides for loans, the plan may limit the amount that may be taken as a loan to an amount that is set forth in the plan document. However, the maximum amount that can be borrowed at any time cannot exceed the amount that is set forth in IRC Section 72(p)(2)(A).”)

• Internal Revenue Code, 26 USC 72(p)(2)(A) (“Paragraph (1) shall not apply to any loan to the extent that such loan (when added to the outstanding balance of all other loans from such plan whether made on, before, or after August 13, 1982), does not exceed the lesser of

(i) $50,000, reduced by the excess (if any) of (I) the highest outstanding balance of loans from the plan during the 1-year period ending on the day before the date on which such loan was made, over (II) the outstanding balance of loans from the plan on the date on which such loan was made, or

(ii) the greater of (I) one-half of the present value of the nonforfeitable accrued benefit of the employee under the plan, or (II) $10,000.”)