Defaulted Participant Loan

[Guest cease]

Would someone please help me with the following:

If a participant takes a loan from a DC plan, which is not a money purchase plan and where the normal form of distribution is a lump sum and whereby the plan allows for in-service withdrawal distributions prior to age 59-1/2, and this participant a short time later stops making payments (for simplicity purposes, the payments stop in April 2002) and the partiicpant remains actively employed through 12/31/02 (calendar year plan year). Since the loan meets the conditions of a deemed distribution, what other reason would preclude a recordkeeper from treating this as a deemed distribution subject to 1099-R reporting? I am being told that due to a new "IRS Ruling" that this defaulted amount will continue to be treated as a loan balance until the participant leaves the plan or repays the loan.

I would appreciate either a quick explanation or cite to something that I can review. I have read the temp regs under 1.72(p) and come to the conclusion that this particular circumstance is a reportable event.

Thanks.

[R. Butler]

Assuming no cure period or the cure period is over, based on the facts you set forth there would be a deemed distribution. A 1099-R would be issued. However, unless there is a distributable event the loan is not offset and it is still trakced as an asset.