Taxation of Defaulted Loan

[KateSmithPA]

We took over the record-keeping for a plan in 2001. I was reviewing the outstanding loans with the client and they said that they were unaware of one of the loans. In researching this, they discovered that an employee took a loan in 2000 but never made any payments on that loan. I have determined that the loan defaulted in 2001.

The participant wants to leave the loan in default and receive a 1099 for the deemed distribution. I have explained that the amount of the loan is taxable for the 2001 calendar year and that if she has already filed her tax return, she will have to file an amended return. I have also explained to her that although she must report this income for 2001, she will not recieve her 1099 until next year because it is too late to receive a 1099 this year.

This seems fairly simple to me, which always gets me worried. Have I missed anything?

Thank you.

[MGB]

I don't understand why it "is too late to issue a 1099 for 2001." Yes, it is late, but it is still a 2001 1099, not a 2002.

[Guest b2kates]

I agree that it is late to issue. but issuing in 2002 is also wrong.

the exposure for late issuance is I believe $50.00 per form.

why wait!

[JanetM]

You could also argue the loan is not in default yet. The rules say the loan is in default at the end of the quarter following the quarter in which the last payment was made. Since no payments have been made - TECHNICALLY - the loan is not in default. Participant could make one payment in 2002 - then default this year.

[RCK]

I disagree with JanetM's interpretation. I think that loan default rules vary by plan, but if the plan says default occurs at the end of the quarter following the quarter of last payment, the default date would be probably be March 31, 2001. I suppose that you could argue that if the first payment was not due until 2001, then the deafult date is June 30, 2001.

But I don't think that you can say that the default does not occur until the end of the quarter following whichever quarter the only payment occurs in.

RCK

[Belgarath]

The cure period doesn't depend upon the date of the last payment. It can't be later than the last day of the calendar quarter following the calendar quarter in which the required installment payment was DUE. (1.72(p)-1 Q&A 10.) Of course, the cure period can be less, or there may not be one at all, according to the terms of the plan.

But it's based upon when the last payment was due, not when the last payment was made.

[KateSmithPA]

Thank you all for your help. I have one more question and now I really feel dumb. b2kates you mentioned issuing a 2001 1099 now for a $50 late fee. So we could give the participant a 1099 right now for 2001 and be done with the whole thing? I was under the impression we had to wait until next year to get the 1099 although it would be coded with a "P" for previous year.