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Single Member Plan, only asset is the participant loan. Okay?


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I am being asked if this person's plan can have total assets of only their pension loan.  Here is what I know.

Woman intended to start a business (did actually) and opened a 401(k) plan.  She rolled into the plan $200,000+ worth of IRA and pension money from her previous employer.  She took a $50,000 loan and was making quarterly payments.  COVID hit and her business went nowhere.  She ended up rolling her IRA and previous employer plan money out and into an IRA (felt it was safer).  She ended up stopping her loan payments as well so all that is in the plan is the loan balance.  

I told her that if she wanted to close the plan her loan would be a deemed distribution.  She does not want that.  Can it go along with only the loan as an asset?

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If she stopped loan payments, then the loan is in default and a deemed distribution has already occurred, or will as soon as the cure period expires.

Technically, even after default, the loan obligation still exists. Repayments would create after-tax basis in the plan.

Terminating the plan creates a distributable event and then a loan offset occurs, which is a real (as opposed to a deemed) distribution.

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I think I'd recommend the following course of action but you do what you want.

1 - suggest they terminate the plan

2 - get paid in advance

3 - if possible, treat the distribution of the loan as a qualified plan offset (gives her till next October to come up with funds to pay off loan as rollover). you can probably only do this if the plan is terminated before the cure period expires.

4 - resign if they want to keep the plan going without repaying the loan on the loan schedule.

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I think we need to know the date of the oldest unpaid loan payment before we can give any advice.  I'm of the opinion that it is ok to have the loan as the only asset but somehow I suspect it really should have been deemed in 2020 which creates a different issue.

Ed Snyder

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3 hours ago, Bird said:

I think we need to know the date of the oldest unpaid loan payment before we can give any advice.  I'm of the opinion that it is ok to have the loan as the only asset but somehow I suspect it really should have been deemed in 2020 which creates a different issue.

I agree, assuming the repayments are made timely which would mean very quickly the loan is not the only asset. However, in t his case it does not sound like repayments have in the past or will in the future be made timely.

I also agree that whether or not they are still in the cure period and when that cure period ended is important.

 

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