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Update - Unable to repay plan loan - Job Change


Guest Brennan Pinkerton CPA
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Guest Brennan Pinkerton CPA

I posted a query last week re a plan participant changing jobs, not able to repay a plan loan from old plan, has after-tax contributions balance equal to approx. 30% of total vested account. One reply indicated the plan loan would be fully taxable ( and subject to penalty in this case )and the old plan admin. would withhold out of the after-tax contributions, then return the remaining balance of after-tax contributions to participant. Remaining account balance would then be rolled over to new employer's plan.

Just double-checking, do I understand this correctly?

Is there an ERISA requirement re how fast the after-tax contributions must be returned?

If the participant could get back his after-tax balance within the 60 day rollover window, he could negate a large part of the tax and penalty on the loan distribution by using this money to fund a rollover IRA.

Thanks for any info on this.

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Guest Beavis

It sounds like your understanding is correct. It is likely that this loan amount is an eligible rollover distribution. The participant would be able to use the cash that they received from the distribution of their basis amount to fund the rollover of loan offset amount.

While the participant likely cannot rollover the loan note, they would be able to rollover the amount distributed in the form of a loan offset.

I believe that you asked last week something about allocating part of the basis amount to the loan offset. I believe that technically this is possible, but if the participant's intention is to roll over as much as possible, making this distinction does not matter. As long as the loan offset is an eligible rollover distribution, the participant can roll $70,000 (assumes facts from previous example provided by you).

Total Acct Bal: $100,000

Outstanding Loan Bal: $30,000

Basis: $30,000

If this loan has previously been taxed as a deemed distribution, then it would not be an eligible rollover distribution.

The employer should distribute the participant's basis amount to them at the time that the remaining cash balance is rolled to the new plan. The participant should however check their SPD to verify that there aren't any wacky provisions with regard to timing of distributions.

[This message has been edited by Beavis (edited 08-20-98).]

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