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Loans Taken but Not Allowed in Doc


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We just got a new plan and a participant (HCE) took a $35,000 loan back in late 2009, the loan note and amortization schedule is interest only payments until final principal and interest payment (so the loan is already bad from the beginning). However, the Plan document he provided didn't allow for loans back in 2009 (he is looking for any amendments but cant recall).

If the Plan didn't allow for loans, how is this corrected? Is this considered an 'overpayment' but since it was back in 2009 can it be paid back (as an overpayment)?

Thanks.

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EPCRS, Rev. Proc. 2013-12 has information on loan corrections. You can start with sections 6.02(6) and 6.07. There is a correction method for a plan that allowed loans in operation, but the document doesn't have loan provisions in Appendix B, 2.07(2)(a). A VCP filing is the only way to change the taxation on the loan, but it must be corrected before the end of the original maximum loan period and you have to request tax relief. With the original loan set up with interest only until a final balloon payment, it would be taxable to him in 2009 unless corrected under VCP.

if you treat it as an improper distribution, it would be taxable to him in 2009.

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