Effect of Participant's Death on Outstanding Loan

[Guest rocnrols2]

I have the following questions concerning the option to beneficiaries to repay an outstanding plan loan and about the person who would be taxed if such option were not offered or were offered and the loan went into default:

If a participant dies with an outstanding loan, does the plan offer to allow the beneficiaries to repay it? Can the plan limit the class of beneficiaries eligble to repay the loan to the participant's spouse? If the loan becomes defaulted because the plan did not offer a repayment option, is the participant taxable in his/her final income tax return or is her/his estate taxable? Would the result change if the option to repay the loan was offered to one or more beneficiaries and the loan was not repaid?

[Alf]

The plan could proide several alternatives, but frequently death is a defualt event. The loan would be offset against the account and that woudl be taxable as a distrbution unless it was made up by a spouse in an IRA rollover within the requisite time period.

A plan would rarely allow a beneficiary to continue to repay the loan on its original terms, but it could. The plan could limit this as much as it wanted.

The tax would be on the participant via a 1099R. If the plan allowed the beneficiary to continue the loan, I guess the beneficiary would be taxed on the default, but not sure.

[Kirk Maldonado]

This may trigger the income in respect of a decedent rules. (I'm just raising the issue; I don't know the answer.)

[Guest rocnrols2]

Thanks for both of your responses. Alf, I was referring not so much to having the beneficiary continue to pay the loan according to its terms, but instead paying off the entire outstanding loan by the end of the calendar quarter following the calendar quarter of the participant's death. In other words, it would be analogous to the situation in which the participant terminated employment and s/he has until the end of the next succeeding calendar quarter to pay off the entire outstanding balance.

[Alf]

If the default was paid off in lump sum before the required offset, everything would be fine from a qualified plan perspective. Confirm the terms of the plan b/c not all allow a grace period or one that long.

There is an issue about how the decedent paid the loan off I suppose (probate authorization?).

Also, is the payoff necessary? It probably depends on who the beneficiary is, but a deemed distribution on loan default is an eligible rollover distribution I believe if the cash is made up into an IRA.