How to Calculate Accrued Interest on Deemed Distribution for 1099-R

[Guest dyoder]

Can someone tell me exactly how accrued interest is calculated for purposes of reporting a defaulted loan on the 1099-R.

[ccassetty]

The first thing you need to do is read through the plan's loan program, plan document, and the loan paperwork of the participant to see how, if at all, this is addressed. You need to use whatever methodology is given there.

Absent any guidance, here is one way of doing it.

The interest is calculated only through the default date, not through the end of the year and is based on the interest rate being used by the loan. (unless you are talking about someone who is away on military duty under USERRA, in which case the interest rate is capped at 6%). If the loan document doesn't say otherwise, I would base the compounding on the payment frequency. Example:

Loan balance as of last payment received: $2,000 as of 4/15/03

Payments made twice monthly, on the 1st and 15th.

Annual interest rate: 7%

Date of default (no later than the end of the calendar quarter following the calendar quarter or as specified in the loan document, if sooner): 9/30/03

Interest per payment period is .07 divided by 24 payments per year = .002917 (if the loan documentation provides the interest rate per period, use that)

Payment periods from last payment through date of default: 5 months (May-Sept) X 2 payments per month = 10 + 1 for the last half of April = 11

Lacking a fancy calculator, I just put 1.002917 into my constant in my calculator and then X 2,000 and hit the "=" key 11 times.

This gives a loan balance of $2,065.12 for the 1099-R.

If the participant ever asks for another loan, you will need to continue this calculation of interest from date of default through the date of the requested loan in order to correctly calculate the new maximum loan amount.

There probably are other methods out there, but I think this works as well as any.