Loan in excess of maximum allowable amount

[Guest MarkN]

CEO of a company had part of a loan defaulted (don't ask me why they didn't default the whole thing...) while the plan was at a prior recordkeeper. He has since taken another loan but the administrator did not take into account the defaulted amount in the calculation of the maximum allowable amount. This resulted in a loan being issued for about $10,000 more than it should have been. This also violated the plan loan provisions which no not permit loans to be issued to participants who have defaulted on loans.

The plan does not allow in service withdrawals for participants under age 59.5 unless a hardship so I can't go back and treat the excess as a legit distribution and issue a 1099.

Any suggestions on how this should be corrected?

Thanks!

[Guest rocnrols2]

According to the 72(p) regulations, the default of a plan loan for violating 72(p) is not treated as a distribution for purposes of the qualified plan prohibitions on in-service distributions. See Reg. Sec. 1.72(p)-1, Q&A-12. However, the CEO would be subject to the 10% premature distributions tax assuming s/he were under age 59 1/2. Then enforce the bar on loans against the CEO prospectively.