When is a Loan Considered a Deemed Distribution?Posted on September 29 2009 by admin
Many 401(k) plans permit participants to borrow from the plan, and it’s becoming a more and more common practice for participants to do so. The plan document must specify if loans are permitted. The majority of those loans are repaid according to the terms of the loan agreement. However, there are instances when a participant defaults – and then it’s typically left up to the plan administrator to deal with this issue.
A loan taken from an employee benefit plan that is in default is generally treated as a taxable distribution from the plan of the entire outstanding balance of the loan (a “deemed distribution”). A company’s plan’s terms will generally specify how the plan handles the default – for example, the plan may provide that a loan does not become a “deemed distribution” until the end of the calendar quarter following the quarter in which the repayment was missed.
If a participant failed to make payments on a plan loan, the missed payments can still be made even after a deemed distribution has occurred. This correction can be made by making a lump sum payment equal to what should have been made to the plan, plus interest, reamortization of the outstanding balance of the loan over the remaining payment schedule of the original term of the loan, or a combination of either of the above methods.
Jessica Puckett, CPA, CFE
Finding information on employee benefit plans can be difficult and time consuming. As a service to our clients, and other interested parties who are involved in or in need of employee benefit services, we'll gather all of the information for you. We'll keep you up-to-date on the latest laws and regulations and we will even add our own personal insight into what else is occurring in the employee benefits world. We will provide these posts weekly and hope to get your input and feedback on the various topics. We will also share that feedback with others, as we find appropriate.
Before posting a comment on a blog post please be aware that we do not give free advice to non-clients by email, comment response, or phone. Thank you!
- The Importance of Obtaining a Quality Audit
- Participant Loans – IRS Requirements
- Investment Policy – Why and What to Include?
- 2016 Retirement Plan Limits
- Compliance for Small Company Employee Benefit Plans
- 401K Pre-Approved Plans 2016 Deadline
- FASB’s Employee Benefit Plan Reporting Simplification
- Do I Need an Audit?
- Compliance Testing Failures – Now What?
- Key Qualities to Evaluate When Selecting an Auditor for Your Employee Benefit Plan