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EPCRS, corrected part loan: treatment of now incorrect 1099R


QP_Guy

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Anyone have any experience using EPCRS to correct defaulted loans?

 

(d) Defaulted loans. A failure to repay a loan in accordance with loan terms that satisfy § 72(p)(2) may be corrected by (i) a single-sum corrective payment equal to the amount that the affected participant would have paid to the plan if there had been no failure to repay the plan, plus interest accrued on the missed payments,

 

This is pretty cool, but I am getting stuck on details…

 

I have a 2018 deemed loan with a 1099R, the participant and employer do all they should to self correct -- done.  How does the participant handle the 2018 1099R? Don’t report income and wait for the IRS to ask?  Must the custodian issue a corrected 1099?  Or??

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@QP_Guy

I'm 99% sure that based on the facts as you present them, self correction is not available.    You have two issues here. 

  1.  The loan has already been deemed and a 1099-R has been issued. The loan failure has already been addressed by the deemed distribution, so there is no failure to correct anymore.  Rev Proc 2019-19 does not explicitly state that you have to correct before the loan is deemed, but everyone I have talked to has agreed that you cannot correct a failure to repay after it has been deemed (and in this case a 1099 has been issued).  
  2. The failure was addressed before rev proc 2019-19 was issued.  Even if you could "undo" a deemed distribution, you could not undo one that happened before the correction was available.

 

 

 

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Great feedback, but what about...

19 hours ago, RatherBeGolfing said:

The loan has already been deemed and a 1099-R has been issued.

That just can't be right when the employer withheld the pay and simply didn't pay it over to the recordkeeper.   More, then the correction would be subject to the whimsy of the recordkeeper and the timing in the year of the deemed distribution.  (a Q1 deemed distribution won't get a 1099 for 9 months, a Q2 will have 6 months, etc.)  A Q4 deemed distribution would get a 1099 within weeks, certainly that's too high a bar for EPCRS.

Is there ANY citation or guidance that everyone is relying on for that understanding?

 

19 hours ago, RatherBeGolfing said:

The failure was addressed before rev proc 2019-19 was issued.

RP 2018-52, section 6.07(3)

(3) Defaulted loans. A failure to repay the loan in accordance with the loan terms where the terms satisfy § 72(p)(2) may be corrected by (i) a single-sum repayment equal to the additional repayments that the affected participant would have made to the plan if there had been no failure to repay the plan, plus interest accrued on the missed repayments

I know that i was surprised that i've not heard more on this, seems like a big deal.

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44 minutes ago, QP_Guy said:

RP 2018-52, section 6.07(3)

(3) Defaulted loans. A failure to repay the loan in accordance with the loan terms where the terms satisfy § 72(p)(2) may be corrected by (i) a single-sum repayment equal to the additional repayments that the affected participant would have made to the plan if there had been no failure to repay the plan, plus interest accrued on the missed repayments

I know that i was surprised that i've not heard more on this, seems like a big deal.

Self correction was not available under Rev Proc 2018-52, you had to go through VCP.  Rev Proc 2019-19 allows for self correction of some plan loan failures.  If you can't self correct the failure you have to go through VCP.

47 minutes ago, QP_Guy said:

That just can't be right when the employer withheld the pay and simply didn't pay it over to the recordkeeper.   More, then the correction would be subject to the whimsy of the recordkeeper and the timing in the year of the deemed distribution.  (a Q1 deemed distribution won't get a 1099 for 9 months, a Q2 will have 6 months, etc.)  A Q4 deemed distribution would get a 1099 within weeks, certainly that's too high a bar for EPCRS.

You are right, if you correct the deemed distribution, you do not have to issue the 1099-R.  Recordkeepers are playing catch up here though, so I'm sure we will see new procedures.  

I went back and re-listened to last week's ERISAPedia webcast with Stephen, Ilene, and Derrin.  They all agree you cant use self correction under 2019-19 to fix a 2018 1099-R on a deemed loan, you would need to VCP.  They seemed at least open to the idea of an amended 1099-R if its for a failure after April 19, 2019.  I have also talked to folks who are not comfortable with self correction once the 1099-R has been issued, saying you should VCP.

 

 

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It seems like Rev. Proc. 2019-19 is incomplete and not completely consistent on some of the loan self-correction guidance. The prior guidance was clear that you couldn't self-correct loans, and that if you corrected under VCP and you did not want to issue the 1099-R, or wanted to issue it in a different year than the deemed distribution would otherwise have been reportable, you had to ask for that specifically in your VCP request. Now, in 2019-19, IRS says you can self-correct a defaulted loan, and doesn't seem to distinguish between situations where the default occurred because the employee did not meet his/her obligations (e.g. in a plan that permits repayment by check after termination of employment, the employee stopped paying, but now has come into some money and wants to bring the loan up to date outside the default period), or because the plan failed to meet its obligation, e.g. a payroll error in not withholding loan repayments. The second sentence of Section 6.07(3)(a) of Rev. Proc. 2019-19 says, "the IRS reserves the right to limit the use of these correction methods [including 6.07(3)(d) for correcting defaulted loans] to situations that it considers appropriate, for example, if the loan failure is caused by employer action," but how can they do that if they permit defaulted loans to be corrected in SCP?

My guess is that what IRS may have intended is that if the default was the employer's fault, then you can self-correct (within the two-year SCP period) by reamortizing, and then you could issue a corrected 1099-R showing zero, but that is just speculation on my part. If the participant simply did not pay as required through no fault of the employer's, and the loan is timely deemed, then like RatherBeGolfing, I don't think there is anything to correct.

Luke Bailey

Senior Counsel

Clark Hill PLC

214-651-4572 (O) | LBailey@clarkhill.com

2600 Dallas Parkway Suite 600

Frisco, TX 75034

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thanks guys for your good input, truly.  While we may guess at what the IRS meant with loans defaulted due to the participant's fault, that really wasn't the focus of my question.

I'm not focused on VCP vs. SCP.  (sorry i used the words 'self correct' in the OP.)

Rather, under either SCP or VCP, if the loan was cured how does the participant file taxes?  How does the participant deal with the incorrect 1099-R?  MUST the 1099-R custodian correct?  What to do if the 1099-R custodian doesn't or won't.  Does satisfaction of EPCRS requirements create an OBLIGATION  for the tax reporter to "fix" the now incorrect 1099-R?

 

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30 minutes ago, QP_Guy said:

I'm not focused on VCP vs. SCP

But the Rev Proc is focused on VCP vs, SCP.  You can make limited corrections under SCP, anything beyond that scope has to be fixed under VCP.  

32 minutes ago, QP_Guy said:

Rather, under either SCP or VCP, if the loan was cured how does the participant file taxes?

Assuming that you can undo a deemed distribution once the 1099-R has been issued, it would be a corrected 1099-R.  There seems to be some agreement that you could do it if the failure and correction happened after the April 19, 2019 date of Rev Proc 2019-19, but before that you are under Rev Proc 2018-52 and VCP is the only available correction.

36 minutes ago, QP_Guy said:

 MUST the 1099-R custodian correct?

Yes, if it has been corrected there is no failure.  If there is no failure there is no deemed distribution.  If there is no deemed distribution there is no 1099-R.  

42 minutes ago, QP_Guy said:

What to do if the 1099-R custodian doesn't or won't.

If you corrected under SCP, your other option is to formally correct under VCP.  I don't think any  custodian or provider would refuse to file a corrected 1099-R if the failure was corrected under VCP.

46 minutes ago, QP_Guy said:

Does satisfaction of EPCRS requirements create an OBLIGATION  for the tax reporter to "fix" the now incorrect 1099-R?

The rev proc says that corrected deemed distribution is "not required to be reported on Form 1099-R".  Could a provider insist on VCP rather than SCP?  I think so since the DOL still requires VCP in order to issue a no action letter.  

I'll flip the question.  If the tax reporter issued a 1099-R for a deemed distribution that no longer happened, can it refuse to issue a corrected 1099-R?  I don't see how they could refuse.  The only thing they could reasonably insist on is the method of correction since (VCP rather than SCP).

 

 

 

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  • 1 month later...

 

Quote

That just can't be right when the employer withheld the pay and simply didn't pay it over to the recordkeeper.   More, then the correction would be subject to the whimsy of the recordkeeper and the timing in the year of the deemed distribution.  (a Q1 deemed distribution won't get a 1099 for 9 months, a Q2 will have 6 months, etc.)  A Q4 deemed distribution would get a 1099 within weeks, certainly that's too high a bar for EPCRS.

 

I'm confused.  I believe the OP indicated that the loan repayment amount was withheld from the employee's paycheck, just not remitted to the trust.  I don't know that this is even a loan failure.  I think this is a PT under 4975 for a failure to timely remit employee contributions to the plan's trust as soon as administratively practicable.  I think you just remit to the plan with lost earnings and file Form 5330 with excise tax or submit under VFCP, no?  If so, you'll need Form 5330 for 2018 and 2019 (with any applicable pyramiding) and the 2018 Form 5330 is late (assuming calendar year plan year) unless you can show reasonable cause.

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49 minutes ago, J. Bringhurst said:

 

 

I'm confused.  I believe the OP indicated that the loan repayment amount was withheld from the employee's paycheck, just not remitted to the trust.  I don't know that this is even a loan failure.  I think this is a PT under 4975 for a failure to timely remit employee contributions to the plan's trust as soon as administratively practicable.  I think you just remit to the plan with lost earnings and file Form 5330 with excise tax or submit under VFCP, no?  If so, you'll need Form 5330 for 2018 and 2019 (with any applicable pyramiding) and the 2018 Form 5330 is late (assuming calendar year plan year) unless you can show reasonable cause.

Maybe that's correct but it leaves the essence of the question unanswered: what about the 1099?  It's wrong.  Because the employer didn't pay over the loan payments, the recordkeeper deemed the loan and issued a 1099.  The IRS is expecting the participant to declare that 1099 amount as income.  The participant and plan request a new corrected 1099.  MUST the recordkeeper provide a corrected 1099?

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2 hours ago, J. Bringhurst said:

I'm confused.  I believe the OP indicated that the loan repayment amount was withheld from the employee's paycheck, just not remitted to the trust.  I don't know that this is even a loan failure.  I think this is a PT under 4975 for a failure to timely remit employee contributions to the plan's trust as soon as administratively practicable.  I think you just remit to the plan with lost earnings and file Form 5330 with excise tax or submit under VFCP, no?  If so, you'll need Form 5330 for 2018 and 2019 (with any applicable pyramiding) and the 2018 Form 5330 is late (assuming calendar year plan year) unless you can show reasonable cause.

 

They are two separate issues.  There is still a loan failure because the loan payments were not made.  The Employer caused the failure but could correct it under VCP.  The failure to timely remit would also need to be corrected.

 

 

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