Loans in Default

[Guest Kmoha@aol.com]

I am working with a takeover plan. A 2000 terminated participant stopped paying on a loan in the last quarter of 2000. The prinicipal balance is about $5,000 (without accruing interest). She wants to take a lump-sum distribution from her 401(k) account (about $3,000). Should interest on the loan be accrued through the 1st Qt 2001 or through 2002? Even though she had a deemed distribution as of 3/31/01, should 20% tax still be withheld when she takes her lump sum in 2002 and/or should she receive a 2002 Form 1099R?

thanks

[Belgarath]

This question can get a little tricky depending upon the details. I'm assuming from your post that the participant terminated employment in 2000. I'm also assuming that the cure period ended 1-31-01. If this plan document is like most that I have seen, there would have been a deemed distribution and an immediate offset in 2001, which should have been reported on a 1099 for 2001. If there was an offset as mentioned above, then no further interest would accrue after the offset. When she takes the balance of her distribution (3,000) in 2002, it would have the mandatory 20% withholding if not a direct rollover, and a 1099 would be issued for 2002.

This is further complicated by the fact that the final loan regs weren't final back then, so there were a lot of different interpretations and procedures by employers, trustees, and TPA's.

[Guest Kimberly Flett]

THANKS