Timing of reporting deemed distribution for USERRA employee.

[Guest Jose Rosario]

I cannot locate any authority on point setting forth the timing requirements for reporting deemed distributions of loans defaulted during periods of military service, except for a statement to that effect on page 5 of CIGNA's 10/01 Pension Analayst publication.

I agree with CIGNA, and I think a good-faith reading of the final regs concerning deemed distributions (as amended by SBJPA) would require that deemed distributions made on account of a defaulted loan for which loan repayments were not suspended by the plan (as permitted by USERRA) should not be reported as taxable distributions until the affected employee's period of military service expires. To report such a taxable distribution prior to the expiration of the employee's period of military service

would seem to go against the employee/benefit protection

grain of USERRA.

Please comment, and note any supporting authority for your comments. Any comment from CIGNA personnel would be especially appreciated.

[2muchstress]

This was discussed at length in a session of the ASPA Summer Conference for 2001 in San Fran. I don't remember the speaker, nor can I find my notes (Mondays, ARGH!)

But if anybody else attended that conference, that might be a good place to look.

[Guest Jose Rosario]

Thanks, 2. Thats a great lead.

(By the way, talk about Mondays... AFTER vaca! double AARRGGHH)

[Guest Jose Rosario]

The IRS responded to my question concerning the timing of issuing form 1099-r for defaulted loans during userra service:

The Form 1099-R must be filed with the Internal Revenue Service on or before February 28 of the year following the calendar year the distribution was made, or March 31, if filed electronically. There is no special consideration given for filing the Form 1099-R given your question, "When should Form 1099-R be issued to report a loan from a qualified plan which defaults during a period of military service protected by Userra?"

[2muchstress]

Okay, I found my ASPA binder from 2001!!! The workshop I was referring to was Workshop #16 "Participant Loans - Dealing with Practical Questions that are Not Answered in the Regulations" presented by James C. Paul, APM, Esq., Chang, Ruthenberg & Long Law, Gold River, CA.

The following is directly from the presenter's material, it is not my own. Hope this helps.

"A plan may suspend the obligation to repay a loan while a participant is in military service. In this case, the suspension will not cause a loan to be a deemed distribution even if the suspension of repayments exceeds one year and the loan term is extended. However, upon completion of military service, the loan must be repaid in full by the end of the original loan term extended by the period of military service, and the frequency and amount of installments following military service may not be less than the frequency and amount provided under the terms of the original loan. Proposed Treasury Regs. section 1.72(p)-1, Q&A 9(B).

ASPA Comments to IRS: The Proposed Regulation provides that the obligation to repay a participant loan may be suspended during military service without causing a deemed distribution. Following suspension of the payment obligation, the term of the loan may be extended so long as the loan is paid in full by the end of the period equal to the original loan term plus the period of military service, and the frequency and amount of payments are not less than required under the terms of the original loan. Although the term of the loan may be extended to include the period of military service, the Proposed Regulation requires that interest accrued during military service must also be repaid within the extended term. This necessarily means that the amount of each loan payment following military service must be larger than the payment prior to military service. This could work a hardship on serviceman if they are not able to make larger payments on a participant loan following a return from military service. We suggest that the Proposed Regulations be modified to allow the term to be extended following military service for the period required to pay the loan in full (including interest accrued during military service), assuming payments are made with the same frequency and in the same amount as before military service. "

Sorry for being lengthy and repetitive, but those were not my words.

It would seem to me that you would not have a loan default at all if the participant is serving in the military. You would just carry the loan on the books until they return.

[Guest Jose Rosario]

Thanks, again, 2. The discussion you posted applies where a plan suspends loan repayments, and is exactly correct concerning the current law; also, I would hope IRS acts on ASPA's comment to alleviate the repayment burden on our returning military personnel.

The 1099-r timing question I had concerned plans that DO NOT suspend loan repayments; I thought there might be some

special consideration given returning military personnel who default while they were gone, but apparently none is given. This, too, would work a possible hardship on returning military personnel.