Deemed loan or loan offset?

[FundeK]

Can you please tell me how you would handle the following situation, and any supporting cite or references?

Participant fails to make loan payment in June 2003, loan should have been deemed at the end of the cure period, which would have been Oct 1, 2003.

Participant terminated in December and requests distribution.

Would you deem the loan and then process the distribution request, or would you offset the loan and then process the distribution request.

The participant now has a distributable event, can you deem it at distribution because it should have been deemed, but never was? Or, does the distributable event now not allow you to deem?

[E as in ERISA]

I'd deem. Consider a slightly different fact situation: The cure period ended December 31, 2003, and the termination occurred in 2004. I think you'd have a 2003 taxable event that you'd need to report. I don't think that the fact that you failed to flag it as deemed in the recordkeeping system changes that.

[Appleby]

I agree. Whether the loan is treated as a deemed distribution or an offset is determined by whether the loan was in default. If the loan was in default, then the only option is to deem. Treating it as an offset would be in effect saying that all payments were made timely and so on... which is not the case

[jquazza]

I absolutely disagree. The reason you default a loan is because the participant doesn't have a distributable event. Once the participant terminated employment, he has a distributable event (I assume as most plan docs will allow that,) hence, you don't need to do a "deemed distribution", a regular distribution is in order. Process your loan offset.

[Appleby]

I absolutely disagree.  The reason you default a loan is because the participant doesn't have a distributable event.  Once the participant terminated employment, he has a distributable event (I assume as most plan docs will allow that,) hence, you don't need to do a "deemed distribution", a regular distribution is in order. Process your loan offset.

The reason a loan becomes defaulted is because payments are not made at least quarterly (exceptions apply) – not because there is no triggering/distributable event. If the loan is in default, and there is no distributable event, then the distribution (deemed distribution) is deferred until a triggering event occurs. When the participant who has no triggering event at the time of default has a triggering event ( afterwards), the loan must then be treated as a deemed distribution, and reported with a code-L in box 7 of the form 1099-R.

In this particular situation, it is a deemed distrbution. Not an offset