Failure to deduct loan repayments

[LIBERTYKID]

Loans from a 401(k) plan were provided to participants in accordance with proper documentation. Plan Administrator (employer) forgot for over a year to commence loan repayments from the participant's salary. Is this an operational error that can be corrected under one of the alphahbet soup correction programs? The employer screwed up but did so as the employer and not as the plan administrator. But the plan administrator should have noticed that loan repayments were not being made (evidently the participants did not). If it is an operational error, how do you correct? I know you can reamortize the loan (not more than over five years from the original term) with interest accruing from the date of the original loan, but is there anyway around defaulting the loan and taxing the participants on the amount of the loan? If not, why get relief at all?

[R. Butler]

We had this exact situation. Employer failed to withhold, nobody noticed for 6 months. We searched the Code and Regs. extensively and could not find a way to get around the default.

We ended up treating the loan in the same manner as any default. We did not go through any kind of correction program.

[LIBERTYKID]

Perhaps I can argue the regs were only proposed until 1/1/2002, and that the loans occurred in 2001?