Plan Loans - Corrections

[Guest billyj]

Several participants have plan loans that the plan provides should automatically be made by payroll deduction. For a number of administrative reasons, the employer and the TPA either never started repayments by payroll deduction or deductions did not equal the required installment amounts. The failure has just been discovered so participants have not yet been notified. Many participants have payments that were due in the first quarter of this year or sooner but have not yet been made. (The plan does not have loan procedures so we are choosing the latest date possible for the grace period.)

At least some of these loans must be defaulted in order to comply with Section 72 but we are hesitant to do that because this is arguably the employer's fault. Instead, we propose to allow participants to refinance the old loans with a new loan (assuming they have enough in their accounts to do so and the refinancing otherwise complies with Section 72). Because we are not declaring default for the prior loans but are required to under Section 72, we would file Form 5330 and pay the associated excise tax.

Does anyone see any problems to this approach or a simpler solution? Thanks in advance for your help.

[R. Butler]

This has been discussed many times. You should do a quick search of this topic; you'll find several threads with in depth discussion on both sides of the issue.

If the cure period is passed, I don't see any basis to avoid defaulting the loan. You will find some people who disagree.

[Guest billyj]

Thanks. Will do.