LCARUSI

This is in response to Casey's message: My response is based on the proposed loan reg 1.72(p)-1: 1) The participant should receive a 1099-R for $5,000. Interest that accrues after the deemed distribution is disregarded for tax reporting purposes. 2) Interest should accrue on the loan for other purposes - such as calculating the maximum loan amount available for future loans. 3) I'm not sure what year the 1099-R should be issued for. I would make an argument for 1997. The grace period ends on 12/31/96, so you default the loan on January 1, 1997. This seems reasonable - and creates less havoc for the participant than issuing a 1996 1099-R. I guess the participant would prefer a 1998 1099-R but I can't justify doing that.

I have a comment relating to making the match in company stock. As you know, a Sponsor has a fiduciary obligation to invest plan assets prudently (assuming this obligation is not passed along to participants in a 404©Plan). So the Sponsor should be prepared to demonstrate that mandatory investment of the match in conmpany stock is in fact a prudent investment

You include: 1)pre-tax deferrals + earnings 2)company match + earnings 3)ee after-tax + earnings I'm not 100% certain about the defaulted loan, but I am guessing you include it as long as it has not actually been distributed from the participant's account. You don't include rollovers from unrelated companies which were accepted by this company after 12/31/83. You do include rollovers prior to 1/1/84.

I am working with two clients with a similar problem. They both have a 401(k) Plan with a loan provision. They have both made isolated errors in that they neglected to take loan repayments for a couple of participants. The periods of nonpayment vary from 2 months to almost one year. Counsel for one sponsor has said it is not necessary to default the loans as long as they can get the participant caught up on repayments within a five year period (measured from the original loan date). Counsel for the other sponsor says failure to make repayments is a default - regardless of how or why it happened. I would really appreciate anyone else's thoughts or comments on this issue.

Just a comment... If I were the participant, I would want the premiums to be taxable. It seems to me that if they are not taxable, then any benefit payments I receive under the LTD Plan WOULD be taxable - and that could be a disaster from a tax perspective.

I agree with Beavis. I don't think there is any reason why you could not grant the hardship after the loan. Furthermore, if the participant satisfies the plan requirements for a hardship withdrawal, I don't think the sponsor could deny it (using the loan issue as a basis for denial).

For starters, you should check the Plan Document to make sure the Plan allows for it. You can then take a look at the applicable regulation for some specific guidance - 1.401(m)-1(B)...