Loan Testing
Confirm loans are within the vested-balance limit, supported by home-purchase documentation when the term exceeds 60 months, agree the period-end balance to the amortization schedule, and review 1099-R Code L and Code M.
Confirms loans are within the vested-balance limit, supports terms over 60 months with home-purchase documentation, agrees the period-end balance to the amortization schedule, and reviews 1099-R Code L and Code M.
Purpose
To verify that participant loans were issued in accordance with plan documents and IRS limits, that loan balances at period end agree to the amortization schedule, and that loans with terms exceeding 60 months are supported by home purchase documentation.
Procedures
- Select participant loans to test and enter the employee name for each sample item.
- Obtain the signed promissory note, participant account statement, and loan amortization schedule for each loan. For loans with a repayment term exceeding 60 months, also obtain the HUD-1 or equivalent home purchase settlement statement.
- Confirm the original loan balance does not exceed 50% of the participant's vested account balance at the date of issuance, and that the loan was issued in accordance with the plan's loan policy.
- For loans with a term exceeding 60 months, confirm the loan was made for the purchase of the participant's primary residence.
- Agree the outstanding loan balance at the audit period end to the amortization schedule.
- Review Form 1099-R for any Code L (deemed distribution) or Code M (plan loan offset) amounts, which may indicate a loan in default or a loan that was offset upon plan termination or participant severance.
Engagement Variables
These are set by EBP Plan Analysis and referenced automatically when this procedure runs.
| Engagement Variable | What it provides this procedure |
|---|---|
| Loans & Distributions Overview | The plan document sections governing participant loans: maximum loan amounts, permissible loan purposes, repayment terms, interest rate requirements, and conditions under which a loan may exceed the standard 60-month repayment period. Used as the policy source when evaluating whether each loan was issued in accordance with plan documents. |
Your selections
| Selection | What to enter | Why it matters |
|---|---|---|
| Employee Name | The participant's full name as it appears in the plan's loan records. | Used to match all document groups (promissory note, participant account statement, amortization schedule, HUD-1 if applicable, and 1099-R) to the correct participant. Unlike other EBP workflows, all loan terms and amounts are drawn from the promissory note rather than entered as selections. |
One row per promissory note. A participant may have more than one active loan. Enter a separate sample row for each loan. Each loan's terms, vested balance at origination, and amortization schedule must be evaluated independently.
Documents to provide
| Document | What to provide | Key data used |
|---|---|---|
| Signed Promissory Note | The executed loan agreement signed by the participant. Must show the participant name, loan origination date, original loan balance, interest rate, repayment term (in payments), first payment date, and loan maturity date. | All key loan terms: participant name, origination and maturity dates, original balance, interest rate, and term. Also the primary policy check: Agentive evaluates whether the loan appears consistent with plan documents using the Loans & Distributions Overview. The original balance is used to calculate the loan as a percentage of the participant's vested balance. |
| Participant Account Statement | The participant's account statement as of the loan origination date. Must show the total vested account balance at that date. | Vested balance at the date of issuance. Used to calculate the loan as a percentage of the participant's vested account (original loan balance ÷ vested balance). IRS rules generally limit plan loans to the lesser of 50% of the vested balance or $50,000. |
| Loan Amortization Schedule | The full amortization schedule for the loan. Must show the outstanding balance at or near the audit period end date. | Outstanding loan balance at the audit period end. Used to confirm that the balance recorded in the plan's financial statements agrees to the repayment schedule, and that the loan is being repaid on time. |
| HUD-1 / Settlement Statement | Required when the loan term exceeds 60 months. The HUD-1 or Closing Disclosure from the home purchase transaction. Provide for those loans only. | Confirmation that the loan was used for the purchase of the participant's primary residence. Under IRS rules, loans with a term exceeding 60 months are only permissible when made for a home purchase, and the settlement statement is the evidence supporting this exception. |
| Form 1099-R | Required only if a 1099-R was issued in connection with this loan. Matched to the participant by name. | Code L amount (Box 7), indicating a deemed distribution (the loan was treated as taxable because it went into default). Code M amount (Box 7), indicating a plan loan offset, typically triggered by plan termination or participant severance. Either code warrants follow-up. |
Don't have these exact documents?
Use Co-Audit to change which documents this request asks for, and to adjust the procedures and calculations that read them, so the workflow matches what your client actually provides.
Testing attributes
Judgment-assisted result; auditor confirms before concluding. Agentive surfaces the relevant plan rule and explains its evaluation, but the auditor reviews the reasoning and records the final determination.
| Testing Attribute | What it tests and what to review |
|---|---|
| Loan Made in Accordance with Plan Documents | A policy instruction evaluated against the Loans & Distributions Overview. Agentive assesses whether the loan terms (purpose, interest rate, repayment schedule, and origination) appear consistent with the plan's loan policy. Review the conclusion and the supporting reasoning. |
| Original Loan Balance Within Vested Balance Limit | Calculates the loan amount as a percentage of the participant's vested account balance at origination. IRS rules generally cap plan loans at the lesser of 50% of the vested balance or $50,000. A result above 50% is a potential prohibited transaction and requires immediate follow-up with the plan administrator. |
| Loan Term Exceeding 60 Months Supported by Home Purchase Documentation | For loans with a repayment term greater than 60 months. Confirms that the HUD-1 or settlement statement establishes the loan was used for the purchase of the participant's primary residence. Loans exceeding the standard 60-month limit are only permissible under this specific exception. If a long-term loan has no HUD-1, it may constitute a prohibited transaction. |
| Loan Balance at Period End Agrees to Amortization Schedule | Agrees the outstanding loan balance at the audit period end date to the amortization schedule. A difference may indicate missed payments, an off-schedule repayment, or a recordkeeping error. Differences should be resolved with the plan administrator or recordkeeper before concluding. |
| Code L / Code M Amounts Reviewed | Flags any deemed distributions (Code L) or plan loan offsets (Code M) reported on Form 1099-R. A Code L amount means the loan went into default and was treated as a taxable distribution; confirm that the plan and the participant were notified and that the tax reporting is complete. A Code M amount typically arises from plan termination or severance; confirm the offset was properly processed and reported. |
Update with Co-Audit
Real client data rarely matches a template exactly. When the loan documents you receive, the schedule you are handed, or a plan-specific loan provision differ from what this template assumes, use Co-Audit to retool the request. Describe what is different and it rewrites the document groups, AI Prompt Columns, and calculations to fit.
Situations where Co-Audit helps with Loan Testing:
- The plan permits residential loans up to a term other than 60 months. Have Co-Audit update the policy check so the home-purchase documentation requirement triggers at the plan's actual term limit instead of the standard 60-month threshold.
- The recordkeeper provides a consolidated loan summary instead of individual promissory notes. Have Co-Audit update the document groups to read each loan's terms from the summary, keyed by participant name.
- The amortization schedule does not show a balance at the audit period end and needs to be carried forward to that date. Have Co-Audit add a step that recalculates the outstanding balance to the period-end date before the agreement runs.
- The vested-balance limit needs to reflect the dollar cap as well as the percentage. Have Co-Audit confirm the original loan balance against the lesser of 50% of the vested balance or
$50,000, so the limit test flags both the percentage and the hard dollar ceiling.
Describe the difference in the Co-Audit panel
For example: "the recordkeeper provides a consolidated loan summary instead of individual promissory notes; update the document groups to read loan terms from the summary, keyed by participant name."
Let Co-Audit update the workflow
It revises the document groups, AI Prompt Columns, and calculations.
Review every change
Watch the columns for red text (a broken reference) and re-check any cell that involves math, where the AI tends to copy a number forward instead of recalculating.
For broader detail on tailoring requests and fixing broken column links, see Tailor a request with Co-Audit in the EBP hub. Code L deemed distributions also surface inside Distribution & Benefit Payment Testing when a 1099-R is part of that sample.
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