S-Corp shareholder took a loan

[Guest Boilerburm]

POsted this in distribution thread and didn't get any help - so I will try it here!

Without our knowledge, an owner-employee S-Corp shareholder took a loan from his plan in 2000. The new EGTRRA regs would exempt this transaction from the PT rules if it were to happen after December 31, 2001. In write-ups on the new rules, I have seen it said that the IRS will also waive penalties for these transactions made before 2002 if the loans would have been allowed had the new law's change been in effect throughout the period of the loan. However, I can't find any official documentation of this. Can anyone help point me in the right direction to determine if I have a problem

[Guest sdolce]

Look at the Conference Committee Reports on Section 612 of EGTRA. I don't think the waiver applies in your situation. I think what they're saying is that,if the loan was OK when first made.e.g. the guy was a C-Corp,then became a shareholder,partner or sole proprietor, then the new provision in effect applies retroactively.But your guy was always a disqualified person,so he doesn't get the pass.Also, if the plan specifically prohibits loan to dq's you may have a failure to follow the terms of the plan

[Appleby]

Actually, I just read an intrepretation that would suggest that the loan could be taken now, by the sole proprietor and be granfathered under the new rules.

"While this change is effective beginning January 1, 2002, it will apply to a loan made prior to January 1, 2002 if the loan otherwise conforms to the regulatory requirements for plan loans. This means that plan loans can be made available to owner-employees now."

See this link for details...... The above quote was taken from here . it was actually posted on this website

http://www.kl.com/PracticeAreas/erisa/reconcilact.pdf

[Guest sdolce]

I don't get it (wouldn't be the first time).The conference report talks about waiving penalties in the instance where the loan "was exempt when initially made." How could it have been exempt (from the PT rules) if he was a disqualified person? In any event the waiver only applies to the PT aspect of the loan. If the plan document doesn't allow loans to owners you'll still have a problem on that side that will dwarf the PT issues.

[Belgarath]

I agree with the first response from sdolce. It's always difficult to try to interpret the thought process (or lack thereof) in a committee report. Absent specific guidance on this issue, I think you have to stick with the letter of the law. My understanding was the same as sdolce as to the purpose of the "penalty waiver."

[R. Butler]

I agree with the previous response. Section 612© clearly states that the provision is effective for plan years after December 31, 2001. It doesn't make sense to look at a committee report and arrive at a conclusion that is totally contrary to the letter of the law.

[Guest sdolce]

Guess what. Since the initial post I've discussed this with two ERISA attorneys that we do a lot of work with and they both think think that the pass is retroactive.But they also agree that the plan language must take precedence.For now I'm just going to add this to my list of questions for Jim Holland and the rest of the usual suspects at the ASPA conference in October.