Loan to Sub-S owner: Prohibited transaction or disqualification?

[Guest LMalone]

Sub-S owner takes a plan loan, which, of course, the Plan and Code do not permit. The loan has been repaid. We know this is a prohibited transaction, but how is it determined when a "mere" PT becomes a disqualifying event? There are other issues of concern, but none dealing with discrimination against Non-HCEs. Is there a laundry list of offenses that would disqualify a plan? How can one determine this?

Thanks.

[Bob R]

I don't have a list of events that could disqualify a plan (it would certainly be a long list). But, you might want to look at the Q & As on benefitslink -- there is section on correcting plan defects. In there you will see 100 or so of some common problems.

Regarding your specific question, a PT doesn't generally result in the disqualification of a plan. However, this particular PT could result in a disqualification because of the anti-alienation rules. The anti-alienation rules prohibit a participant from using an interest in the plan as collateral for a loan. But, if you look at the Code (I think it's IRC Section 401(a)(13)), it states that you can use an interest in the plan as collateral for a plan loan -- if the loan is exempt from the prohibited transaction rules. So, the problem you have is that if the interest in the plan was used as collateral (which most plans require) then the plan could be disqualified.