What is the correct formula for determining the maximum loan amount a participant may receive for a defined contribution (DC) plan?

The formula for determining the maximum loan amount a participant may receive from a defined contribution plan is indeed based on specific rules outlined in the Internal Revenue Code. The correct option describes a formula that takes into account both the percentage of the vested account balance and the overall limits on loans.

Specifically, the maximum loan amount that a participant can borrow is the lesser of 50% of their vested account balance or $50,000, reduced by any outstanding loan amounts. This dual consideration ensures that participants have access to a portion of their funds while also maintaining the integrity of the plan and protecting its assets. By outlining the maximum allowable loan amounts based on account balance and existing loans, this formula effectively caps the borrowing limit in a way that safeguards the plan’s long-term viability.

The inclusion of both the percentage and the dollar limit addresses the need to manage the risk to the retirement savings of participants. Additionally, it recognizes that if a participant has existing loans, those amounts must be subtracted to avoid excessive borrowing that could jeopardize their retirement savings.

Thus, the correct answer captures all elements of the calculation necessary for determining a loan under a defined contribution plan, ensuring compliance with IRS guidelines while offering participants financial flexibility.