Participant Loan/Prohibited Transaction

[Guest ActuaryWannabe]

We are the TPA for a plan in which a participant took out a participant loan a couple of years ago, but never made any payments on it. In addition to being taxable, does this now become a prohibited transaction, because it no longer complies with 72(p)? Or is that determined at the time the loan is taken? Major disagreement in the office, expensive lunch riding on the answer!

[Kirk Maldonado]

What is the statutory basis for arguing that violating section 72(p) because of a failure to make payments causes a violation of the prohibited transaction rules?

The people in your office make expensive bets on questions like this without doing any research?

Can I get involved in these bets too? I think I've just found a great new revenue source.

[Belgarath]

I agree with Kirk - it's impossible to make such a determination from the limited information given. Depending upon specific facts and circumstances, I think it is possible that there could be a PT, but generally unlikely. Reviewing the examples 2550.408b-1 (link attached) should prove helpful. And some of the folks here may be able to give you references to specific court cases, perhaps.

http://www.dol.gov/dol/allcfr/ebsa/Title_2...2550.408b-1.htm

[Guest ActuaryWannabe]

Needless to say, I was on what appears to be the winning side of this expensive bet. Life is good. So is lunch.

[Belgarath]

Depends on the lunch. I often find I'm eating crow. Sounds like yours will be much better!