Failure to make loan repayments

[J. Bringhurst]

A client's payroll system failed to deduct loan repayments from a participant's paycheck and the loan is, technically, in default. The participant affected did not notify the company of the failure to deduct the repayments. The client also, in another situation, timely deducted the loan repayments from a participant's paycheck but failed to remit the repayment to the plan's trust.

In the second situation, the issue is clearly a prohibited transaction under 4979 and IRS Form 5330 should be prepared and the applicable excise tax paid. Since the loan repayments were timely withheld, there does not appear to be any issue under 72(p) with regard to a defaulted loan and/or deemed distributions. Correct?

In the first situation, however, the failure to make scheduled loan repayments that throw the loan into default was not the doing of the participant, per se. Shall I assume that this is, nevertheless, a deemed distribution situation? Are there any other corrections out there when the fault is more on the side of the employer?

[R. Butler]

In your first situation, if the cure period is over I see no basis top avoid a default. However, I have seen a contrary view in a prior post.

http://benefitslink.com/boards/index.php?s...t=0entry63728

I agree with you that there is no default in the second situation.