Reporting defaulted loans

[pbarrett]

I am preparing a 5500 for 2002 year on a small ps plan. I have two defaulted loans (on two active HC participants). The accounts are all participant directed. I am reporting on line 2g of the Schedule I.

It is my understanding I still need to carry the loan until the loans are paid off or the participants quit.

If I deduct them on 2g, how do I keep the value in the plan? Do I show the defaulted loans plus interest as a receivable? I know there must be some easy trick to this.

The valuation report is an issue too. I can distribute the loans within their accounts; but then what-- do I add it back in some way? I realize when I do the final final 1099R I adjust the basis but until then I'm confused has to how to account for it. This is an annual val.

The total amount of the 2 loans is $75,000 so it will stand out with total assets of $325,000.

If anyone has any ideas on how to account for this transaction, please advise.

Thanks!

[four01kman]

I'm not going to answer the specific question, because I don't know the answer. Keep in mind, however, the default of a loan does NOT create an actual distribution of plan assets, rather it is a deemed distribution, which creates a taxable event for the participants. The DOL issued loan regulations fairly recently which goes into this area in a detailed manner.

[Guest At Peace]

Recently I've had to research the final regs and this is my understanding:

Until the participant has repaid the loan or it has been offset, the loans are reflected on your report and continue to accrue interest - basically a receivable. Participant still has obligation to pay. Your 5500 and report will not reflect the same total. If the participant begins making payments again, then the loan is restored as an asset on the Form 5500 (payments also create a "basis" in account).

The 1099R Form reflects the amount of the deemed distribution plus interest accrued to the date of default (not the interest after the date of the default).

Later, when the participant's account balance is offset (check the loan policy - might be at time of default, termination or distribution), then the total of the loan plus all accrued interest is used to offset the account balance. The 1099R will not include the defaulted loan (if previously reported), nor the interest accrued after the default.

Until offset, the outstanding loan and the accrued interest are still used in determining top-heavy, subsequent loan limits, etc.

Some PS plans allow in-service distributions. Possibly, this could be used in satisfying the loan obligation if requirements met and requested for this purpose(?)

Hope this helps a little.