Taxation of accrued interest on deemed loan.

[Guest EBC]

I have a MPPP in which a participant had a loan deemed in 1993 and reported on 1099R. Accrued interest amounts to present were also reported on 1099R. The participant has now terminated. How does the amounts reported on 1099R for accrued interest affect his balance which he wants to rollover to an IRA? Is the sum of the interest amounts reported considered as taxed and therefore not eligible for rollover? Or is his entire vested balance still taxable and therefor eligible to be rolled over?

[Guest]

ERISA outline Book notes the following

'The legislative history of 72(p) had indicated that accrued interest would be treated as an additional loan to the participant and taxed as an additional deemed distribution. See page 321 of Se. Rept No 97-494 (1982) and page 297 of the General Explanation of the Revenue Provision of TEFRA, published by the Joint Committee on Taxation (December 31, 1982). However, the Tax Court rejected the concept of taxing accrued interest, stating that 72(p) only taxes loans received from the plan and accrued interest is not actually received by the participant. See Chapman vs Commissioner, 73T.C.M. 2405(1997). The IRS has chosen to follow the Tax Court's view.

hope that helps!

[KJohnson]

I think the proposed regs deal with the interest situation. Look at 1.72(p)-1 Q&A 19 which provides that there is no taxable deemed distribution of additional accrued interest after the initial default and deemed distribution.

There is also a difference between a "deemed distribution" and a "loan offset" Loan offsets can be rolled over into another plan but not into an IRA. You might want to look at the examples in 1.402©-2 Q&A9--particularly example 6.

[This message has been edited by KJohnson (edited 02-08-2000).]