Repaying a Deemed Loan

[FundeK]

When a participant chooses to repay a deemed loan, do they have to repay the 1099-R amount (which included accrued interest through the cure period) as well as all accrued interest from the end of the cure period to the date of payment?

[FundeK]

NEVERMIND. I found the answer in Sal's ERISA Outline book.

Chapter 7: Taxation Rules - Section IX (Participant loans): Part E.2.d (Loan offsets that occur after default - tax and plan accounting rules regarding accrued interest on defaulted loans)

2.d.4) Accrued interest is integral to the determination of the total repayment obligation. Since the unpaid loan is still an obligation, the accrued interest is necessary to accurately determine the participant™s payment obligation. The plan may be successful in enforcing repayment of the loan, or the participant might voluntarily repay the loan. The additional repayment obligation generated from the accrued interest represents funds the participant can pay to the plan that will not be treated as annual additions under IRC §415 (because they are treated as earnings of the trust with respect to the loan) and can be invested to generate

additional trust income for the participant™s benefit. In addition, starting January 1, 2002, the repayment of the defaulted loan could increase the amount the participant may be able to rollover to another plan, even though the repayments would generate basis.