401k Loan Default then Repayment

[Guest jhannifan]

If a participant defaults on a 401k loan (by missing payments) and receives a 1099R for the distibution and then begins to repay the reammortized loan after the default how is this handled? For example, I assume if they default again it is not taxable again but I'm not sure how that situation would be treated. What happens if they quit or are laid off before loan is repayed. Are there other issues associated with such an arrangement?

[Guest AFRICA6796]

I have never heard of a plan loan being reamortized-but this may show how little I know about qualified plan loans. My limited knowledge leads me to believe that once the loan is in default, a 1099-R is issued for the outstanding balance (processed and reported as a deemed distribution) . The participant would still be required to make loan repayments, which will accumulate as after tax contributions. If there is still an outstanding balance when the employer terminates from employment, the employer may either permit the employee to continue making repayments or treat the outstanding balance as an offset.

[KIP KRAUS]

AFRICA6796:

I’ve never heard of this type of situation before. My questions is this, if the loan has been defaulted and a 1099-R issued why would the loan still have to be paid off via payroll deduction? It seems to me that the outstanding balance would get gets deducted from the participant’s account balance as an uncorrectable receivable. If the participant pays the penalty and taxes on the defaulted loan, why make him pay it back any way?

[Guest Dave Danziger]

I believe the final loan regs 1.72(p)-1 make it clear that the borrower will have basis in any repaid amounts, up to the full amount of the deemed distribution. These regs take effect for plan years beginning in 2002, however, the regs also provide guidance for making them applicable to your plan earlier.

[Jilliandiz]

What would happen if a participant had a loan and they terminated before their loan was paid off? Would it be defaulted? What if they left to open their own company, could they just rollover the loan?