Defaulted Participant Loans - No 1099 Given; Prohibited Transaction?

[Guest Chaffee]

I have received mixed messages and was looking for some guidance for a situation involving participant loans. Due to various issues, a Plan had several instances where loans were in default, but no 1099 was ever given (in some cases default was two years ago):

- Participant terminated with unpaid loan balance and received cash distribution for all non-loan assets. 1099 was issued only for non-loan assets.

- Participant was active, but payments stopped on loan before repayment completed. No 1099 was ever issued.

Do either of these instances qualify as a prohibited transaction? At the inception of the loan, all the DOL rules were met for the prohibited transaction exemption. I have heard some indicate that the failure to issue the 1099 constitutes losing the exemption, and would need to be reported as a PT. Others have indicated that this is a reporting issue with penalties for failure to issue the 1099, but not a prohibited transaction, since the loans met the exemption rules at inception.

Anybody have similar instances and how they were treated?