Defaulted Loan not reported

[Guest MEWilson]

Situation: Participant terminates employment and elects to leave his money invested. He has >$5000 cash. He also has an outstanding loan that will not be repaid. The outstanding loan balance would be a taxable distribution to the participant in 2004. What are the consequences if the employer elects to not report the defaulted loan as a distribution?

[FundeK]

A basic requirement of any loan program or loan policy is that it must contain provisions detailing what constitutes a defaulted loan and what procedures will be taken upon the loan default. Failure to follow the terms of the loan policy is an operation failure, which could lead to plan disqualification.

[QDROphile]

How about willful failure to issue Form 1099-R? Subject to indeterminate penalties, I think. The employer does not make the decisions about distributions, the plan administrator does.

[Guest curmudgeon]

In addition to the above, you run the risk of having an invalid loan program, which would make all of your loans prohibited transactions>illegal distributions>plan dq.