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I can't find guidance in the 5500 instructions or the 5500 Preparer's Manual, so I'm looking for opinions - or maybe something I've missed. Two questions: 1. If the only loans in a self-directed 401(k) plan have been deemed distributed in a prior plan year (not offset), is 10g answered yes or no? For example, the only loan in the 401(k) plan was deemed distributed in 2022 - should 10g be yes on the 2023 Form 5500-SF? 2. Do outstanding balances for loans that have been deemed distributed (not offset) continue to be included in the amount on line 10g? I'm leaning towards yes, and yes, but I have nothing to back me up. Even though they are deemed, they are still participant loans, but since they are no longer reported as assets on the 5500... I'm torn.

An employer provides for loan deferment for qualified individuals under the CARES Act. If a participant has already defaulted on their loan but later becomes a qualified individual, does the employer still have to give that participant the option to defer the loan (i.e., reverse the loan default)?

New client has outstanding loans with missed payments. Some loans have not been paid on at all going back a year. I was going to give the following options to the client for correcting. Please let me know if there are any issues with these: 1. Catch up loans for all missed payments including interest and start loan payments on next payroll. 2. Re-amortize loans, with new start date but same end date as original loan so it is still paid off within 5 years of the loan origin. If this is allowed, the interest rate of the original plan was higher than the current so I would re-amortize using the current (lower) interest rate. 3. Have participants take out a second loan for the missed payments, and contribute the money back to the plan and start both loans on next payroll. (assuming the plan allows for 2 loans and the second loan does not exceed the limit based on their balance or $50k) 4. Have 59.5 employees take in-service distribution (trued up for taxes) for missed loan payments, and contribute the money back to the plan. Note: none of these loans are for HCEs.

Facts: A Safe Harbor 401k PSP currently permits all participants including terminated participants with vested account balances to take participant loans, with repayment via cashiers check (actives via payroll withholding). In the course of permitting such loans, they have come to realize the difficulties in collecting payments and the resources used to follow-up, and, as a result want to modify the Plan's loan provision to permit loans only to Active Partipants and Parties in Interest going forward. Question: Will an Amendment eliminating loan availability to terminated participants violate a BRF provision? Are they a protected BRF? Any existing loans will continue repayment as per there current terms. And as I said above, loans will continue to be available to Actives and PII. Or must the Amendment include a provision stating vested account balances as of the Amendment date must be protected and available for loan purposes even if termination occurs at some later date? Thank you.

Hi to All, We just got a phone call from HR lady of our client to say that a certain participant who has a participant loan is in the process of dying of pancreatic cancer and has been out on medical leave for the last 6 months. He's not really expected to ever come back to work, but she hasn't really officially declared him to be terminated, either. The participant took out a participant loan on 12/18/2018 in the amount of $11,650.00. He made two bi-weekly payments of $119.40 on 01/14/2019 and 01/22/2019. He went out on medical leave at that point and has not made any more payments. This quarter ending June 30 is his cure period and so far he hasn't made a payment. HR lady wants to know what his options are. Can he make some little tiny payment like $100 and get another cure period running July 1 to September 30th? Could he do that twice and thereby keep his loan from going into default in 2019? I think she's asking if he can just keep this thing running until he actually passes away and then it becomes someone else's issue at that point. All the situations I have seen so far were "all or nothing" - the person was either making payments, or stopped. I don't know what happens when someone pays a little something but not enough to bring a loan up to date. Of course I know that the loan is supposed to be paid within 5 years of the loan initiation date, but does it get re-amortized each quarter, with higher payments, such that it would still be paid off theoretically within the original 5 year period? Is that even permissible? He could, of course, just let it default and pay the taxes on the deemed distribution at the end of 2019 if he's still alive and has the money to pay them. Any of your thoughts and experiences will be appreciated. Thanks in advance!

Under Rev Proc 2019-19, can we can correct a delinquent loan that has not yet been defaulted? The Rev Proc says that a “defaulted loan” is any loan that is not repaid in accordance with plan terms. Can SCP be used to correct a loan in which several loan payments were missed because the employer’s payroll messed up and failed to withhold the loan deductions? The cure period has not expired so there is no default yet. The question arises because the Rev Proc states that it applies to “defaulted loans” and does not mention delinquent loans. My thought is that the term “defaulted loan” is being used differently than the conventional definition in the Rev. Proc. and we may correct a delinquent loan. Thanks in advance for any thoughts. Rev. Proc. 2019-19, Section 6.07(d) states: Defaulted loans. A failure to repay a loan in accordance with loan terms that satisfy § 72(p)(2) may be corrected by (i) a single-sum corrective payment equal to the amount that the affected participant would have paid to the plan if there had been no failure to repay the plan, plus interest accrued on the missed payments, (ii) reamortizing the outstanding balance of the loan, including accrued interest, over the remaining payment schedule of the original term of the loan or the period remaining had the loan been amortized over the maximum period that complies with § 72(p)(2)(B), as measured from the original date of the loan, or (iii) any combination of (i) or (ii).

Good morning to all, Here's a new one for us. A client called this morning to say that she (owner of the company sponsoring the plan) wants the company to pay off an existing participant loan. The participant happens to be her son who of course is Key and HCE by virtue of his relationship to his parents, the owners. He is currently making payroll deducted payments but "the company" wants to pay his loan off for him in 4 quarterly installments beginning now. She had already called John Hancock to find out if this was feasible and they told her to call us as the TPA. Our first inclination is to say "Sure, why not?" but then we started wondering if this could somehow be construed by an auditor to be a contribution that went only to this one employee and was therefore discriminatory, or whether there is some other problem associated with it. We have no idea how the company would eventually treat this for tax purposes. It's not supposed to be a contribution to the plan of course. It might be additional pay for the son, from which it appears that he's making the payments? This is an issue they have to work out with their CPA. At a minimum, we should run a new amortization schedule for them to correspond to the payments they actually intend to make. Any thoughts on how this could somehow get the client in trouble? Thanks as always for your advice, thoughts, help.

Has anyone seen or does anyone have insight into why we haven't received an update from the IRS on hardship and loan relief to victims of Hurricane Florence, similar to other hurricanes such as Harvey and Matthew? From a quick google search, it appears that the announcement was provided within a few days of the disaster in the past. The only update I can find is with respect to tax relief, but not hardships and loans. https://www.irs.gov/newsroom/help-for-victims-of-hurricane-florence

I am a TPA that received a request from a Financial Advisor asking if participant could get a 30 year principal residence loan (allowed in plan) under the following circumstances: Divorce situation - spouse doesn't want a QDRO, but he needs the money to pay his (ex?)spouse. Can't afford to keep his home unless he receives a loan or hardship distribution Hardships use the Safe Harbor criteria so states 'Costs directly related to the purchase of a principal residence for the Employee (excluding mortgage payments)'. The loan policy states that the loan can be for 30 years if proceeds are used to acquire a dwelling unit which within a reasonable time will be used as your principal residence. He already lives in the house, so I don't think he can do the 30 year loan as he is not acquiring the residence. So it appears that the maximum loan could be only 5 years. I don't see a way for him to do either a 30 year loan or a hardship distribution. Is that an accurate interpretation based upon this information? Looks like the spouse's lawyer is smarter is getting her the money without a QDRO so she doesn't have to pay taxes on it, but that's outside of my hands. I've asked for more information to see if there are any other options, such as distribution from Rollover source and/or in-service at age 59.5. But the Financial Advisor may have already looked into these options. Thank you in advance for any thoughts/options.

Are there any grounds to have a participant's deemed distribution within a 401(k) plan reversed? Are there any reg's that might list certain criteria that must be met? The loans deemed status occurred in 2017, if the record keeper already submitted the 1099-R is there a precedence for reversing it? Lastly, if there are grounds for reversal is it required that the process go through VCP? Your help is appreciated.

I have a participant who has said he would like to stop loan payment withholding from his check because he can no longer afford them and treat it as a taxable distribution. My first thought is he can't while he is still employed there. The loan paperwork (which I have not been able to lay my eyes on since new plan in transition to us) should state that it is an irrevocable pledge and conditional upon payroll deduction repayment. As the plan sponsor, I would think they could not just stop collecting the repayments since it is their job to ensure repayment to the plan. My next idea is to explore a hardship to pay off the remainder of the loan but I am waiting on the participant to express an immediate and heavy financial burden in one of the safe harbor instances. Thoughts on the ability of the plan sponsor to stop withholding the payments? I would think this would be prohibited transaction land.

Hello, what is the consequence if a plan did not obtain the supporting documentation to prove the loan from the 401k or 403b plan was for the purchase of a primary residence? Is self-correction available? Are there penalties/or filings assessed?

Does ERISA permit new plan loans to terminated participants who have remaining account balances? Can you provide the code section if ERISA addresses this topic.

Participant loans give me a headache. We have a plan with a few (3 or less) missed payments on loans that are otherwise in compliance with IRC 72(p). It is a construction company, and the Plan sponsor did not start up payroll deduction payments on time, or there was a short lay-off at the time that payments were to commence. We are well inside of the cure period. We would like to reamortize the loans (rather than doubling up payments to get them current, or demanding a lump sum). Is this really a loan refinance (meaning the loan program must permit refinancing)? Or is it just a reamortization (keeping the terms otherwise the same)? And is something that is eligible for SCP, or does it require VCP? I have been under the impression these types of loan errors could be self-corrected (within the cure period) .

I have been practicing in this area since ERISA became the law of the land, so it is interesting to find something that seems like it should be obvious, but apparently isn't. The question is When does a participant loan failure become reportable on Schedule G of Form 5500. The filing instructions say not to report the following: Do not report in Part I participant loans under an individual account plan with investment experience segregated for each account, that are made in accordance with 29 CFR 2550.408b- 1, and that are secured solely by a portion of the participant’s vested accrued benefit. Report all other participant loans in default or classified as uncollectible on Part I, and list each such loan individually. But, ERISA Reg. Section 2550.408b-1 requires that the loan be made in accordance with the plan's written procedures. Which, if any, of the following would you consider a prohibited transaction? a. Written loan program satisfies conditions of DOL regulations and IRS standards to avoid taxation, but: A loan is made in excess of $50,000. A loan is set up with semi-annual payments. The loan payment schedule is o.k. but payments are inadvertently not started on time. Issue is discovered and corrected before the end of the default period. b. Written loan program does NOT satisfy the conditions of the DOL regulations, loans may be made up to 50% of vested balance of NHCEs or 100% of vested balance for HCEs. c. Loan is made that is consistent with IRS requirements, but written terms of plan do not permit such loans. Errors is corrected under EPCRS. It seems to me that case b. would trigger reportable PTs. It seems that case a.3. should not be a PT. But, things like cases a.1. and a.2. happen and I rarely/never see them reported on Schedule G. They are either treated as taxed or corrected under EPCRS. Case c. can be corrected under EPCRS, but sure seems like it would not be an exempt transaction. Remember for purposes of schedule G - all employees of the plan sponsor are Parties In Interest. So - what do you guys think? Thanks in advance - Becky

Can loan requests be signed electronically by a participant and his/her spouse? If so, what are the rules/requirements that need to be or should be followed to satisfy legal requirements and ensure a participant’s identity?

Hello, Hoping someone can help me figure this out. In June 2014, the plan changed TPAs and there was an error in the transfer of loan balances from the old TPA to the new one, causing certain loan payment schedules and balances to be wrong. In July 2015, the new TPA corrected the payment schedules and the loan balances for the loans affected, however the way they did those adjustments have cause the 2015 loan report to be inaccurate. 1- the beginning loan balances per the 2015 loan report do not agree to the 2014 ending balances. The beginning balances actually seem to be exactly the balances as of the TPA transfer date in June 2014. These balances also appear in the participant's account in the annual activity report under a "converted value" column 2- there are two loans that were offset in 2014 and zeroed out in 2014 when they were deemed distributions. In 2015, because of the issue explained in #1 above, the loans appear to have a beginning balance and are then offset again, causing yet another deemed distribution. This distribution appears in the participant's account in the annual activity report and was therefore included in Form 5500 line 2e(1) when prepared. This is merely a reporting issue since the taxable event occurred only once in 2014, when the 1099s were distributed. In order to correct the 2015 form 5500, I would think distributions line 2e(1) needs to be reduced by the amount of the double counted deemed distributions. Question is, what other line in Schedule H should be adjusted to make it balance? I would think Plan assets needs to be increased, but is that correct? I asked the TPA, since I don't know their system, when the loans were put back on in 2015, what was the other side that was affected so I know how to correct the problem. However, they are not understanding what I mean. As an accountant, we tend to think in terms of debit and credits. Thanks in advance!

A plan's loan policy had a limit of 5 years for participant loans. The vendor issued a loan a couple weeks ago for a 15-year primary residence loan. The plan sponsor does not want to adopt a new loan policy that allows for primary residence loans. The loan is not in default, the end of the cure period hasn't passed. One payment just occurred. Has an actual error occurred that would necessitate VCP? Could this be self-corrected by re-amortizing the loan now to not go outside 5 years or by having the participant pay off the loan now and borrow from outside the plan?

These refinanced loans can get a bit confusing. I think I know the answers but seeking comment if you agree or disagree with any of my conclusions. 1. We have a participant with over 100K balance who had an outstanding loan of $12,000 due October 2017. The plan only allows one loan. In December 2015 they refinanced and withdrew $25,000 to bring the loan balance to $37,000 still due October 2017. Now, the participant has decided they cannot afford the loan payments. They did pay in a lump sum payment of $9,600. I have been asked if the October 2017 date can be extended out to December 2020 (5 years from the loan refinancing) but my understanding is that it cannot as 10/17 is the latest permissible date for the loan. Does anyone disagree that the maturity date has to remain 10/17? 2. The ironic thing is if the participant had just taken around $10,000 or less when they refinanced they could have had a brand new 5 years and then came back and taken more a week, few weeks, months later as long as maturity date was the same. Am I missing anything? 3. When a loan is refinanced is only the actual outstanding loan counted towards the $50,000 look back? For example, if a participant has a $12,000 loan and refinances and withdraws another $25,000. Then six months later, the participant asks for another $5,000. Was the highest balance in the last 12 months just the actual outstanding balance of $37,000 or due to the refinancing considering both loan outstanding for a total of $49,000. (Replaced Loan $12,000 plus Replacement Loan of $37,000). I believe it is just the $37,000 but wanted to see if anyone had another opinion. 4. Does the entire new loan counted towards the $50,000 look back or just the additional amount being issued? For example, a plan allows two loans and the participant already has two (loan #1 $6,000 and loan #2 $15,000) and the highest outstanding loan balance in the last year was $30,000. The participant wants another $10,000. Since loan #2 has a later maturity they would like with that one but would the new loan balance of $25,000 exceed the $50,000 look back? They are only taking $10,000 more dollars but it appears that the entire new balance of the replacement loan must be taken in to account. If so then the participant could only take $10,000 if it was added on to loan #1. It could not be added on to loan #2. Correct? Thanks!

We have a client who has inquired about amending the Plan to require a participant with an outstanding loan, who then requests a hardship distribution, to pay back the loan before they can take the hardship. Is this allowed?