Plan Loan - No loan documents, No payments - How best to correct

[Guest JVH]

Two participants took "loans." NHCE took $4,000 in calendar year 2000 and intended to pay it back, but a promissory note, security agreement, etc. was never signed. The NHCE is in bad financial shape and cannot pay back. We are trying to decide if we should treat this as an in service distribution (which will require a plan amendment), or a default. If a default, what year.

The plan document permits loans, but does not permit in service distributions.

HCE (who is the owner) took a $50,000 loan in 2001, but again, there is no promissory note, etc., and no payments have been made. HCE wants to make all the payments to date instead of taking it as a distribution.

Looking at EPCRS, I don't see any way to deal with this via SCP. It looks like a VCP submission. I think we could amend the plan to add an In Service Distribution provision, but the NHCE distribution would have been in 2000, a closed year.

If we went to VCP, when would IRS make us require us to 1099R the NHCE? Would they let the HCE bring all the payments current, execute the loan documents now, and then complete the 5 year amortization of the loan.

Any thoughts would be appreciated.

[mbozek]

The cleint needs to consult a tax advisor to review how the non benefit tax issues will affect the failure to repay so as to avoid the need to go to the IRS. For the nhce the default could have ocured in 2000 at the end of the quarter in which the loan was made or maybe the loan was in default on inception. Issuing a 1099 for 4000 distribution in 2000 may not result in any income tax to the nhce because the s/l for collecting back taxes generally expired on 4/15/04 if the 2000 AGI was above 16k. The loan to the owner is more complicated because the 3 yr s/l has not expired but perhaps there may be grounds for a recission of the loan.