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Options for Defaulted Loan

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I have a client (non-ERISA 03(b)), who defaulted on a loan in 2019 (it was also deemed in 2019 and a 1099R issued) who is now 59.5. They want the defaulted loan removed so they can take another loan. I was under the impression that once a client has qualifying event, that they would be able to offset the defaulted loan. But reading the requirements for what offsetting a loan, I don't think it would be allowed b/c the loan is not in good standing. Outside of the participant paying back the defaulted loan, is there any other option for the participant to "cure" or "offset" the defaulted loan? Could they just request the defaulted loan to be "distributed" to them since they have a qualifying event? In that case, since a 1099R was already issued for the defaulted loan, we wouldn't have to issue another 1099R right? Any guidance would be appreciated.

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The most significant caution I would add is that the plan sponsor cannot be involved in this transaction.  Any decisions made by the plan sponsor could cause this plan to lose its non-ERISA status and become subject to ERISA.  It is wise never to put loans in a non-ERISA plan. 29 C.F.R. Sec. 2510.3-2(f)

My other suggestion would be to carefully read the plan document language concerning loans and the annuity contract, if there is one.


Patricia Neal Jensen

Vice President and Nonprofit Practice Leader

| QBI, an Ascensus company

21031 Ventura Blvd., 12th Floor

Woodland Hills, CA 91364

E patricia.jensen@QBILLC.com

P 818-449-6096

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If JOH’s mention of non-ERISA does not refer to a governmental plan or a church plan:

If the charitable organization neither “establishe[s]” nor “maintain[s]” an employee-benefit plan, there is nothing the employer must decide and, likely, nothing the employer may decide.

Rather, the insurer or custodian decides whether it provides a loan, including deciding whether some set of preceding facts makes a participant not entitled to some right that otherwise might be provided under the annuity contract or custodial account.

Peter Gulia PC

Fiduciary Guidance Counsel

Philadelphia, Pennsylvania



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It is a governmental Non-ERISA 403(b) plan. And the Plan documents speak on loans, defaulting/deeming a loan, and even how to payback a defaulted loan but it is silent on if a defaulted loan could be distributed due to a qualifying event. I'm curious to know if anyone has ever dealt with this situation or outside of a Non-ERISA plan, how anyone has dealt with someone wanting to offset a defaulted or active loan due to a qualifying event?

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