Improper loan?

[FundeK]

Loan Policy does not allow a class of participants to receive loans. A participant from this class accidentally received a loan in 2003. How is this corrected?

I am guessing we have to issue a 2003 1099-R for a deemed distribution. The participant is unable to pay back the entire amount of the loan (about $18,000) at this time, can he make payments on this deemed distribution? Also, he is under 59 1/2.

It seems unfair that the participant will face huge tax consequences because the plan, or TPA allowed the loan to be issued.

[Mike Preston]

Is the person that received the loan an NHCE? I'd scour EPCRS to see whether a retroactive amendment to expand eligibility for loans wasn't available.

If not, I'd see whether the client would be willing to submit an application to the IRS under EPCRS to cure the problem with said retroactive amendment.

[FundeK]

The loan policy specifically excludes participants living out of the US because there is no way to withhold via payroll deduction. They do not want to retroactively amend to allow this for all participants. Can you amend for one specific participant?

I believe the response to the Plan Sponsor was that the loan would be deemed as a 2003 distribution, and the participant would have to amend their tax return.

[Guest terryh123]

Expanding loan provision retroactively to allow loan for this one person would be an amendment to the loan policy and not technically a plan amendment. Thus, assuming person is a NHCE, using EPCRS and insignificant error correction may be possible, without getting into technical requirements of a permitted retroactive plan amendment (i.e. having to get a d-letter on amendment). I have had luck e-mailing question to regional director of EPCRS program describing situation without disclosing client and getting a nonbinding response back. It is worth a try. Good luck.