Loan Fee

[Guest tlc@cra]

When processing a loan we, the tpa, charge a loan originating fee. Should that fee be part of the principal that is being paid back or not. For example the Participant would like a loan for $1000 we will put $1150 on the truth in lending. The principal on the amort is $1150 interest being paid on the whole amount. We send the participant a check for 1000 and 150 to us. So they are paying the fee back to themselves. Is this correct or should the amort be for $1000?

[Guest Noodle]

If the loan defaults, the participant would be taxed on the entire outstanding loan amount, including the amount paid to you as a fee. Do you feel it would be right for him / her to pay taxes on an amount that he / she never received?

- Noodle

[QDROphile]

Three choices, plenty of opportunity for illusion:

1. Charge the fee outside the plan. Paid with after tax dollars. Saves money in the account compared to #2. Impresses particpant with the idea that the loan is not free or made only of funny money. The particpant could borrow the fee money outside the plan (I note this only for analytical purposes, not as a practical suggestion).

2. Charge to the account and do not include in the loan (but include in truth in lending). A complete loss to the account, but no taxation.

3. The particpant borrows the fee amount from the plan. Include amount in the primary loan. The amount is restored to the account upon loan payment, so the account is not absolutely reduced, as compared to #1. Upon default, is taxed (to some degree depending on the the amount repaid). Compare to #1 (use of after tax dollars). I find no travesty in the possiblity of taxation.

[Guest tlc@cra]

That is our debate here in the office. Should tax be paid on a fee for loan or distribution? I feel that all fees should be handled in the same manner until there is a reg saying a fee for a distribution should be treated differently then any other fee sold in the plan and therefore taxed. A fee is a fee. One note if you use the fee table in relius it will code the fees as gain loss and not include them on a 1099, for loans and distributions.