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1.401(a)(9)-5 discusses the requirements for a DC plan. Basically, since the "account" is not reduced for an outstanding loan, then the value of the loan is included by default. Since you clearly cannot distribute funds that are not actually in the plan, if you DID have a calculated RMD in excess of the assets, you'd probably have to rely on plain old common sense, and perhaps the sentence in Q&A-1 that says, "However, the required minimum distribution will never exceed the entire account balance of the date of distribution." An imperfect justification at best, but I don't see any other option than to handle, for these purposes, as if there is some "non-vested" money, even though there isn't. See A-8 for a discussion of that methodology. I have a hard time imagining that an IRS auditor would attempt to assert a RMD failure in such a circumstance.

[sarcastic]put it anywhere and let the auditor tell where to move it to[/sarcastic]

Lou, I thought about that, but you still have payments that need to be made. How do they get treated? Do they create basis now?

Could you issue a 1099-R for a partial loan offset and reduce the outstanding balance of the loan by the portion that is considered an RMD? Alternatively you could probably just wait until the participant makes a few loan payments this year and they will more than likely have enough cash in the account to cover the RMD.

I would take into consideration some facts and circumstances. lets suppose I provided $1000 to one participant to pass nondiscrimination testing - let's say it gives it gives the person who was at 0 an e-bar of 5.00, just enough to get him into the rate group of the HCE now if that correction is only 20% vested I would argue at that point in time, knowing full well the person is terminated and has no chance to increase vesting, that the 'substance' of the amendment has not been satisfied. you have in effect provided an e-bar of only 1.00. or put another way, instead of provided a 20% vested contribution of 1000, I have in effect provided a 100% vested contribution of $200. I do not think that was the intent of providing a corrective amendment to pass testing. ... under its comments on discriminatory plan design using short term employees the IRS indicates they have an issue about being able to 'pass' but failing a reasonable interpretation of what is reasonable. I would hold that this would hold in a case of a corrective like the example I used. Examples of short service plan designs Some plans limit NHCE benefits to a specific job classification. The result, for discrimination and coverage purposes, is the same because this classification includes only the lowest paid or shortest service group of NHCEs. Another variation on this plan design provides coverage to NHCEs who work on an as-needed basis and earn very little each year. Some plan designs require 1,000 hours to earn a year of service for vesting but not for allocation purposes. In these plans, the low paid or short service NHCEs receive an accrual or allocation but don’t vest in the benefit because they never complete a year of vesting service. Other plan designs define a year of vesting service as the employee’s completion of 12-consecutive months of employment. This design allows the NHCE participant group to become vested in the very small plan benefit. Plans may discriminate even though they allocate a larger percentage of compensation to NHCEs. With this design, NHCEs, on average, may seem to receive a misleadingly large accrual or allocation level. For example, an NHCE participant with $200 of annual compensation may receive a profit sharing allocation of $200 (a benefit equal to 100% of compensation), while an HCE with compensation of $200,000 may receive a benefit of only 25% of compensation or $50,000. Although these designs may allow the plan to satisfy the vesting or numeric general tests for nondiscrimination and the associated regulations, they don’t satisfy Treas. Reg. Section 1.401(a)(4)-1(c)(2), which requires that the provisions of Sections 1.401(a)(4)-1 through 1.401(a)(4)-13 be reasonably interpreted to prevent discrimination in favor of HCEs.

I can't say for sure if there is any "authority" specifically on point, but the analysis is simply that while "cash" left the account, it was replaced with an (enforceable) promissory note of equal value. Hence, the balance doesn't actually go down as a result of the loan having been issued. I can comprehend of no other result with respect to the balance of the account.

a Blinky the 3 eyed fish sighting!

Well, OK. We disagree. I find and fix them virtually all the time - and not just in M&A business, but with respect to ALL new business that comes in the door. Last year, we on-boarded about 450 new plans - and every one of them was reviewed through the process....

Not for me. We terminate the day before the sale always and terminate. Who wants to mess around with protected benefits and different vesting schedules and plans with 15 sources. just a mess. BUT in the original post, this is NOT an option. There is NO change in Employer taking place in the original question.