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Could he move $3,000 from fund A in deferral to fund A in his match account? No. If the loan is an investment, why do you think he could do ostensibly the same thing? Such a setup could be rife with abuse. What if there were no basis in deferral. Loan was taken 100% from PS. Now the participant transfers part of the loan obligation to deferral. Is that kosher?

Sorry, but you are very limited. But make sure to read my note at the end of this quoted info Read this: https://www.irs.gov/tax-professionals/understanding-tax-return-preparer-credentials-and-qualifications LIMITED REPRESENTATION RIGHTS: Some preparers without one of the above credentials (CPA, EA, ATTY) have limited practice rights. They may only represent clients whose returns they prepared and signed, but only before revenue agents, customer service representatives, and similar IRS employees, including the Taxpayer Advocate Service. They cannot represent clients whose returns they did not prepare and they cannot represent clients regarding appeals or collection issues even if they did prepare the return in question. Tax return preparers with limited representation rights include: Annual Filing Season Program Participants – This voluntary program recognizes the efforts of return preparers who are generally not attorneys, certified public accountants, or enrolled agents. It was designed to encourage education and filing season readiness. The IRS issues an Annual Filing Season Program Record of Completion to return preparers who obtain a certain number of continuing education hours in preparation for a specific tax year. Beginning with returns filed after Dec. 31, 2015, only Annual Filing Season Program participants have limited practice rights. Learn more about this program. PTIN Holders – Tax return preparers who have an active preparer tax identification number, but no professional credentials and do not participate in the Annual Filing Season Program, are authorized to prepare tax returns. Beginning January 1, 2016, this is the only authority they have. They have no authority to represent clients before the IRS (except regarding returns they prepared and filed December 31, 2015, and prior). NOTE: Now, read this carefully: you didn't tell us what they are auditing. Was the initial audit letter with regard to a 5500? If not, you most likely cannot represent the client. They can say that they are not auditing the 5500 you prepared, they are auditing the plan. You cannot represent the client for a general audit, only for the return you prepared. Anything outside of the return, you have no authority about. And if they were auditing the 5500 but it has now gone beyond that form, they can also argue that you cannot represent the client with regard to the issues being raised. They can allow you to provide information, but they won't discuss it with you or correspond with you regarding that info if they don't recognize your authority. The IRS has gotten much more sticky on making sure those they work with have the proper authority. Good luck. Larry.

I guess I missed that the loan was already defaulted. Plans track defaulted loans every day. The fact that it might turn into after-tax basis if payments are ever made isn't a new thing. For me, its not a big enough pain to consider a very unorthodox approach to loan management. If you are looking for agreement/ validation or a blessing to your approach - I don't see much here. But the boards have been wrong before, and the IRS does sometimes surprise the industry in how it chooses to interpret things. So who knows. I'd love for someone to pose your question to an IRS panel at a conference and see what they say. I would take this as a lesson to design plan loan policies more carefully, including which sources are used for loan proceeds from the outset. One TPA I know of encourages a hierarchy where loan proceeds are taken first from employer money sources for this very reason. It is often easier to offset than if the loan was taken from deferral.

So - Here's a question - is this really necessary? Does the plan allow for more than one loan? Based on your fact pattern Deferrals $10,000 real money, $5,000 Loan = Total $15,000 Match $7,000 real money = Total $7,000. I'm going to assume 100% vested. Analysis would obviously be different if not. Total Account balance $22,000 Maximum Loan 50% = $11,000 Current outstanding loan balance $5,000 If the plan allows for a new loan - New loan maximum amount $6,000 (assuming there isn't an issue with the high loan balance within the 12 month lookback period). Take a NEW loan from Match - repay the old loan into deferrals, problem solved. I'm sure the actual numbers are different, but if the total account balance is large enough, it might be doable.

Well, maybe I'm pointing out the obvious - but plenty of plans/sponsors/participants have extenuating circumstances. I think we've likely all lived through a recession or two, seen companies go bankrupt, lay off workers, walk away from unfunded plans, seen business owners lose their homes etc. Just because there are extenuating circumstances doesn't mean the action is allowed. Also - what does the loan note say? Was there any other loan paperwork (such as payout instructions) that specified the sources and repayment process? The one we use references a security interest in the vested interest of the Participant's benefit in the plan. If the participant is not fully vested in the match source you propose using - or vested enough to cover the loan balance - the other arguments against notwithstanding, I don't see how the loan could be shown as being part of non-vested money. Also you'd have to make sure the plan even allows for different investments by source. I've seen participant requests to invest Roth money differently than pre-tax money for example, and not all recordkeepers are able to accommodate that, even if the plan wants to allow it. If you are using balance forward brokerage accounts that wouldn't be an issue. I'm still of the mind it's not permitted, but even if permitted there would be numerous issues.

Nope I think you have it just right. A similar question was asked at ASPPA Annual a few years ago while we still had the IRS Q&A, and they agreed it would be plan comp for the next year even though the participant had no hours worked in that year.

You should call the IRS auditor and explain the situation. They should be able to advise you how to proceed. You might need a letter from the sponsor stating that you prepared the Form 5500 for the year under inspection, but you should be able to represent the plan as an unenrolled return preparer.

So we are clear about what is involved, each of the 21 plans will be tested for coverage for each year. Of course, the deferral, match, and nonelective elements of those plans must be broken out and tested separately, particularly if there are different eligibility or allocation conditions. For each plan, the numerator will consist of the employees who benefit from that specific plan. The denominator will take into account all nonexcludable employees from all the employers (based on the eligibility conditions of the plan being tested). If a plan does not pass the ratio percentage test, and you need to perform the average benefit test, then for purposes of the average benefit percentage test (only), you will take into account all nonexcludable employees and all plan maintained by the controlled group (even though you cannot permissively aggregate those plans for other purposes. And by the way, if one of those plans has nonelective contributions which require the general nondiscrimination test, you must rerun the nondiscrimination testing taking into account all the nonexcludable employees. You don't need EPCRS to perform the testing correctly. What you do need is time, data, and somebody willing to pay for the work. And if every plan and subplan passes for every year (which it conceivably could if each company has a similar percentage of HCEs and NHCEs), you heave a huge sigh of relief. And if one of the subplans for one of the years does not pass, you have a demographic failure for that plan. Demographic failures can only be corrected under VCP. Note that it is perfectly acceptable to have some plans ADP tested and some safe harbor, so long as each can separately pass coverage. But, if you have HCEs that participate in more than one plan, that complicates your testing. Or, as an alternative, you could consider putting the whole shooting match under VCP and work out more realistic approach. The choice is yours.

1.401(a)(26)-7(c) and 1.401(a)(4)-11(g)

Does the plan document address this at all (e.g., a fail-safe provision)?