Loan default amount

[Bird]

This has probably come up before...

when defaulting on a loan, do you use the loan value as of the last payment or as of the last date of the cure period? I guess another way of phrasing it is: what is the date of default? e.g. a loan payment is made on Feb 1, and the outstanding balance is $5,000. No payments after that and the cure period ends on June 30. Is the default amount $5,000 or do we have to add interest to June 30?

I'm inclined to think $5,000...

[FundeK]

I'm inclined to think you have to add interest through the end of the cure period.

[wmyer]

The default amount in all cases is just the unpaid principal amount (amount withdrawn). Interest is never added to figure out the amount defaulted. Only the unpaid principal would appear on a 1099-R.

[FundeK]

Treas. Reg. 1.72(p)-1 Q/A 10 (Please see bolded info and example)

Q-10: If a participant fails to make the installment payments required under the terms of a loan that satisfied the requirements of Q&A-3 of this section when made, when does a deemed distribution occur and what is the amount of the deemed distribution?

A-10: (a) Timing of deemed distribution. Failure to make any installment payment when due in accordance with the terms of the loan violates section 72(p)(2)© and, accordingly, results in a deemed distribution at the time of such failure. However, the plan administrator may allow a cure period and section 72(p)(2)© will not be considered to have been violated if the installment payment is made not later than the end of the cure period, which period cannot continue beyond the last day of the calendar quarter following the calendar quarter in which the required installment payment was due.

(b) Amount of deemed distribution. If a loan satisfies Q&A-3 of this section when made, but there is a failure to pay the installment payments required under the terms of the loan (taking into account any cure period allowed under paragraph (a) of this Q&A-10), then the amount of the deemed distribution equals the entire outstanding balance of the loan (including accrued interest) at the time of such failure.

© Example. The following example illustrates the rules in paragraphs (a) and (b) of this Q&A-10 and is based upon the assumptions described in the introductory text of this section:

Example. (i) On August 1, 2002, a participant has a nonforfeitable account balance of $45,000 and borrows $20,000 from a plan to be repaid over 5 years in level monthly installments due at the end of each month. After making all monthly payments due through July 31, 2003, the participant fails to make the payment due on August 31, 2003 or any other monthly payments due thereafter. The plan administrator allows a threemonth cure period.

(ii) As a result of the failure to satisfy the requirement that the loan be repaid in level installments pursuant to section 72(p)(2)©, the participant has a deemed distribution on November 30, 2003, which is the last day of the three-month cure period for the August 31, 2003 installment. The amount of the deemed distribution is $17,157, which is the outstanding balance on the loan at November 30, 2003. Alternatively, if the plan administrator had allowed a cure period through the end of the next calendar quarter, there would be a deemed distribution on December 31, 2003 equal to $17,282, which is the outstanding balance of the loan at December 31, 2003.

[Bird]

Thanks, FundeK, the cite is crystal clear but I just couldn't find it.