What would you do?

[FundeK]

Participant went out on disability 2 years ago. ER has been withholding loan payments but never sent them to the recordkeeper. Just discovered this. Would you deem the loan and have the ER return the loan payments to the participant? Would you apply the loan payments and then deem the loan?

I know the regs are very clear on the fact that a loan needs to be deemed or offset after the cure period has expired. How are you handling administrative errors such as this?

[QDROphile]

I did not check, but think the Department of Labor recently asserted that loan payments are plan assets in the same way that elective deferrals are plan assets.

That is good news for the participant because the loan is not in default, or at least you did not say the amounts held by the employer were insufficient to cover paymentsas they becuame due. I don't think that the failure of the trust to receive the assets would, by itself be a default. Some agency or trust theory could be used to conclude that the loan has been covered

That is bad news for the employer, who has to deal with a prohibited transaction and possibly an operational error. But the employer was at fault, so the employer should expect some unpleasant consequences.

[mbozek]

Under IRS loan regs the loan is not in default as long as the loan payments are withheld from pay. The employer owes the money to the plan to repay the loan payments and the Plan fid has a legal obligation to collect the loan amounts from the employer.

[FundeK]

Thanks, the responses helped greatly.

Under IRS loan regs the loan is not in default as long as the loan payments are withheld from pay

Do you know where I could find this in the regs?

What will you do when a loan is issued, no payroll is withheld for 6 months. You find out the participant cashed the check, but never mentioned to payroll that withholding didn't start. Will you deem in that instance since there weren't any payroll deductions started?

[mbozek]

reg 1.72(p)-1 Q/A-10 loan is in default if participant fails to make a payment.

If the failure to repay was discovered in the same tax year that that the loan was made I would rescind the loan and issue a loan for the same amount and a new 5 year period since the terms of the loan were not complied with from inception (no valid contract was performed if payments were not witheld).

Note:

This is an aggressive concept to most members of this board and requires review by counsel. Most people would perfer that the loan be considered in default and taxable to the participant which creates issues of liability for the plan administrator and employer.

[FundeK]

Sorry to beat a dead horse here...But I just found out the facts are a little different than first reported.

The participant on disability was actually sending payments (personal check) to the company to be transmitted with their payroll files and deposited into the trust. Would you treat this the same as you would if the payments were payroll deducted. I would assume so, but I just wanted your expert opinions.

Thanks

[QDROphile]

All the more reason that the borrower is not in default.

[QDROphile]

I assume that the payment arrangement is provided for under the plan and the borrower has been complying with it correctly. In other words, the only mistake is that the funds were not delivered to the trust.