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NEVERMIND. I found the answer in Sal's ERISA Outline book. Chapter 7: Taxation Rules - Section IX (Participant loans): Part E.2.d (Loan offsets that occur after default - tax and plan accounting rules regarding accrued interest on defaulted loans) 2.d.4) Accrued interest is integral to the determination of the total repayment obligation. Since the unpaid loan is still an obligation, the accrued interest is necessary to accurately determine the participant™s payment obligation. The plan may be successful in enforcing repayment of the loan, or the participant might voluntarily repay the loan. The additional repayment obligation generated from the accrued interest represents funds the participant can pay to the plan that will not be treated as annual additions under IRC §415 (because they are treated as earnings of the trust with respect to the loan) and can be invested to generate additional trust income for the participant™s benefit. In addition, starting January 1, 2002, the repayment of the defaulted loan could increase the amount the participant may be able to rollover to another plan, even though the repayments would generate basis.

When a participant chooses to repay a deemed loan, do they have to repay the 1099-R amount (which included accrued interest through the cure period) as well as all accrued interest from the end of the cure period to the date of payment?

Can anyone else let me know how you handle loan offsets? Do you accrue interest from the last payment date to the date of the offset?

Sorry, I didn't mean to include that, it was my own train of thought....Seeing as most people can't follow my train of thought (or lack of) I should have deleted it before I posted.

Let's see how I do with this one.... To be considered a catch-up contribution, the participant must exceed a plan imposed, or statutory limit. Participant A – Did not exceed a plan imposed limit 1. First look at 2002 deferrals - did not exceed 402(g) for 2002. So, none of the deferral from 8/1/02 to 12/31/02 were previously treated as catch-up and excluded from the ADP test. 2. Next look at 2003 deferrals, have not exceeded 402(g) yet 3. Failed ADP test, so we classify some of the deferrals as catch-up 4. Can treat $2,000 as catch-up contribution for 2003. 5. Contributed $8099 from 1/1/03 to 7/31/03. Can only contribute an additional $5901 from 8/1/03 to 12/31/03. If the participant contributed more, he would exceed the 402(g) limit. You have already used the catch-up contribution so anything over $5901 needs to be returned Participant B – Did not exceed a plan imposed limit 1. First look at 2002 deferrals - exceeded 402(g) for 2002, so $1,000 is treated as catch-up for 2002 and not included in the ADP test. Now we only include $13,025.35 in the ADP test 2. Next look at 2003 deferrals, have not exceeded 402(g) yet 3. Failed ADP test, so we classify some of the deferrals as catch-up 4. Can treat $2,000 as catch-up contribution for 2003. 5. Contributed $12,956.38 from 1/1/03 to 7/31/03. Can only contribute an additional $1043.62 from 8/1/03 to 12/31/03. You have already used the catch-up contribution so anything over $1043.62 needs to be returned

Can you do an retroactive amendment along with the QNEC? Is that potentially discriminatory too?

How about providing QNECs for those individuals who would have been able to make catch-up contributions - similar to the QNEC made for not allowing someone into the plan.

1. Can a participant just choose to have their loan deemed? Say they haven't reached the end of the cure period, but want to have their loan deemed because they say they won't be able to make payments. The loan policy says that a loan will be deemed, if at the end of the cure period, missed payments have not been made up. Would it be a violation of the loan policy to default the loan early? 2. When does the cure period end for a participant who is returning from a 12 month leave of absence? Loan policy allows participant to suspend for up to one year for unpaid leave of absence. I know that a loan goes into default after the first missed payment, and will either be deemed or offset at the end of the cure period. Is the first missed payment in this case, the first payment due after the leave ends? Example.... Participant goes on leave on 2/1/03, was current on monthly loan payments when leave commenced. 12 month period ends on 2/1/04. If he does not resume payments, would you deem after 6/30/04, because the 3/1/04 payment is the 1st on missed, or do you consider the 3/1/03 payment to be the first one missed? Thanks

Plan has to allow catch-up contributions.

Does this thread help at all? http://benefitslink.com/boards/index.php?s...127&hl=hardship

If the payments are spread over a period greater than ten years, they are considered ineligible for rollover and therefore can be taxed at a percent less than the mandatory 20% withholding. I don't have a specific cite offhand, but it is on our tax notice that is mailed with every distribution.

So, are you saying that the Plan Sponsor should follow up with each person who takes a loan to verify they are using the funds how they said they are using them? If, at the time the loan is approved, the Plan Sponsor has all of the supporting documentation and approves the loan, there is no reason they have to follow up to see how they are used. They have approved the loan based on the documenation provided. If, at the time the loan is being issued, the Plan Sponsor knows the proceeds will not be used for the purpose intended, then they should definitely deny the loan, thus honoring the restrictions set forth in the plan. I think in this case, the Sponsor was diligent in making sure the restrictions were honored. They approved the loan based on the restricitions in the plan. How do you feel they are not honoring the restrictions in the plan?

I agree with Harwood. The Plan Sponsor followed the terms of the plan when issuing the loan. What the participant did with the proceeds is their own business.

Are you required to send a tax notice to participants prior to offeting their loan after termination? (I would assume so because it is eligible for rollover) Does a participant need to consent to an "in-service" distribution to offset their loan? Example: Participant is 60, has defaulted on his loan, and plan allows in-service distributions. Does he need to consent to the "in-service" to pay off (offset) his loan? Are we required to send the tax notice? Also, if he does not consent and it goes past the cure period, do we now have to deem the loan? Thanks for your help.

I don't see a problem with your example as long as none of the participant's exceed the 415 limit. It is okay to exceed 25% of compensation with the forfeitures because the forfeitures are not deductible. You can get a deduction for the 25% contribution, but yet each participant may receive 30% contribution (cont + forfeitures). Did that make sense?

I don't think I have ever seen someone get sent to jail for embezzeling pension assets. The Department of Labor announced that the former owner of a Mississippi home health care agency has been sentenced after pleading guilty to embezzlement of 401(k) plan assets. Restitution and Prison Sentence Ordered After Owner’s Failure to Remit Contributions to 401(K) Plan, DOL/EBSA News Release No. 04-111-CHI, February 10, 2004. News Release U.S. Department of Labor Office of Public Affairs Atlanta, Ga Release Number 04-111-ATL For Immediate Release Date: Feb. 10, 2004 Contact: Gloria Della Phone: (202) 693-8664 Former Owner of Mississippi Home Health Care Agency Sentenced for Embezzling Pension Assets ATLANTA-The former owner of Complete Health System, Inc. of Vicksburg, Miss., (formerly Haworth Home Health Agency, Inc.) was sentenced on Jan. 23, 2004 to four months in prison, four months of home confinement, probation and restitution to the company’s 401(k) plan. Ida J. Haworth was sentenced in federal district court in Jackson, Miss. after pleading guilty to one count of embezzling assets belonging to the Haworth Home Health Agency 401(k) Plan. “Theft of employee benefit assets jeopardizes the benefits of workers,” said Howard Marsh, regional director of the Employee Benefits Security Administration (EBSA) in Atlanta. “This case reaffirms our commitment to protect the benefit promises made to workers.” Haworth was indicted on Aug. 20, 2003 for failing to remit approximately $53,000 in employee contributions to the 401(k) plan’s investment manager. She operated several home health care agencies in Louisiana and Mississippi for several years. The Atlanta regional office of the U.S. Department of Labor’s Employee Benefits Security Administration investigated the case. The U.S. Attorney’s Office for the Southern District of Mississippi prosecuted the case. (U.S. v. Haworth) Criminal No. 3:03-CR-128B DOLNews FiduciaryNews PlanAdminNews 401kNews PenaltiesNews

See Treas Reg. 1.72(p)-1 Q9, which is what I used when writing may FAQs. Here is how I answered this question in the FAQs I wrote. Q38: What happens to a participant’s loan when the leave of absence ends? A38: When the participant’s leave ends or after one year if sooner, the participant must repay the outstanding balance of their loan including interest that accrued during the leave by the latest permissible date allowed under IRC § 72(p)(2)(B) (i.e., 5 years from the date of the original loan, unless it is a primary residence loan). If the original term of the loan was for less than five years the IRS will allow the loan to be extended to 5 years. However, the new payment cannot be less than the original loan payment amount. If the original loan term was 5 years, the schedule may not be extended. Below are the repayment options: Option 1: Reamortize the loan for the remaining term so that the remaining loan balance plus accrued interest are repaid (note: The amount of the installments cannot be less than the original loan payment). Option 2: Resume making the normal payment amount and make a balloon payment at the end of the loan term for the remaining balance. Option 3: Make a lump sum payment for the missed payments and accrued interest, and then resume the normal payment amount.

The loan should absolutely NOT be coded with an L. Code L is only used for deemed distributions, which are not eligible for rollover. I do not think the loan should be reported at all. The 1099 instructions, R-3, Transfers, states How would you report other direct trustee transfers?

Here is a little snippet from Sal's ERISA Outline book. Chapter 7: Taxation Rules - Section IX (Participant loans): Part E (Offsetting accrued benefit/delayed offset after default) Don't suppose the loan policy states this?

Can you please tell me how you would handle the following situation, and any supporting cite or references? Participant fails to make loan payment in June 2003, loan should have been deemed at the end of the cure period, which would have been Oct 1, 2003. Participant terminated in December and requests distribution. Would you deem the loan and then process the distribution request, or would you offset the loan and then process the distribution request. The participant now has a distributable event, can you deem it at distribution because it should have been deemed, but never was? Or, does the distributable event now not allow you to deem?

Must use to pay plan expenses. These are my favorite plans!! It either save the participants some $, or the plan sponsor. And they are way easier to administer than a reallocate plan! Do you not want to use the funds to pay expenses?

I would say the loan is in default when it goes past the cure period. The 1099 should be issued in 2004 when you process the offset. An offset is an actual distribution, so a tax notice should be provided to the participant as well. My opinion for what it matters.

Does anyone know where to access this information? I tried doing a few searches on google, but I haven't been very successful. Thanks

Does the document state that forfeitures are to be used to reduce any ER contribution? If so, and if they have another type of ER funded contribution (PS, nonelective) they could use them to reduce ER funding of that contribution. If not, they need to use them to pay plan expenses. Is it a significant $ amount? (just being nosey!)

No.