Plan Termination and Outstanding Loan

[DP]

I have a takeover plan where one participant has a plan loan. There is no written loan policy for the plan. The loan papers she signed does not say anything about the loan being due upon termination of employment.

The owner is terminating the plan as of 9/30/04 and will be closing his business as of 11/30/04.

We were wanting to make distributions to the participants in October. Can I go ahead and distribute this participant's remaining account balance in October and give her until 11/30/04 (date of her termination) to pay back the loan? If she doesn't pay it back, then would the loan balance become a taxable distribution with no withholding?

Thanks for any help on this.

[chris]

I would think the unpaid balance would be treated as an additional distribution upon termination of the Plan since there would be no Plan to pay it back to. I'm sure there is a cite out there for a Reg. or a Tax Court case but don't have it off the top of my head. From the distribution side of it wouldn't you be in the same place even if the participant were able to pay it all back, i.e., ( unrepaid balance on date of termination + actual amount in plan = distribution ) = ( actual amount in plan (which includes repaid balance) = distribution)?

[jevd]

The only difference would be the ability to rollover the entire benefit and avoid tax on the loan.

[chris]

Good point.

[Bird]

If you treated the loan as a deemed distribution in October, she would still have 60 days to roll the taxable amount into her IRA. No different, from her standpoint, from keeping the plan open and repaying the loan to the plan before distribution.

[jevd]

I don't believe a deemed distribution is rollable. Can you support your statement?

[Lori Friedman]

I think that Bird might be confusing a deemed distribution with an offset.

[Bird]

Yes, I meant offset; sorry.