Participant Loan s/h/b defaulted at termination but was not.

[Guest Cliff Langwith]

Participant takes a loan, then terminates the day following receipt of the check. No loan payments were ever made and the loan was not defaulted or offset. One year later the Participant is rehired and now wants to reamortize the loan to extend the term. The term of the unpaid loan is 5 years. I know the loan can't be refinancied or reamortized beyond the original date. But, my belief is the loan cannot be reamortized because it was already taken for 5 years. What we can do is reamortize it for the same term but add to the outstanding amount the interest not paid during the year. That or demand payment in full or default the loan now.

Has anyone dealt with an issue like this? What did you do?

[FundeK]

I think the default/deem/offset terminoligy can be a little confusing so I would like to clarify...When a participant fails to make a scheduled payment on their loan, the loan is considered to be in default, which could result in a deemed distribution (active participant) or an offset (usually for a termination). An offset is an actual distribution, when a deemed distribution is not.

What does the loan policy say regarding participant termination? If it states that the loan will immediately come due and be offset against the participant's account; you may have an operational failure because this was not done. I would think you could offset the loan now, issue a 1099-R for the year of termination, and call it a day (Is this a valid self correction?)

If the loan policy is not that specific, I would think you would have to deem the loan because it is significantly passed the cure period. The participant would no longer be eligible for an offset because there is no distributable event.

I personally would not recommend reamortization or refinance.

Anyone agree?? Disagree??

[Guest Cliff Langwith]

Thanks for the response. I agree. We don't want to reamortize. We should default the loan, issue 1099s and move on.