Loan Interest Calculation

[Guest smscottish]

We have a client who had a loan in a 401(k) pension plan. Before terminating her employment she took a partial distribution of 50% of the loan. She was 1099 for that amount in the year she took the distribution.

The record keeper retained the entire 100% amount of the loan on the books as a liability of the plan. Upon final distribution/rollover of the account, the record keeper charged interest on entire loan liability even tho 50% of the loan had been previously 1099'd. Is this accurate? The employee feels that the accrued interest should have only been on 50% of the loan rather than 100%. Thanks for your help

[mming]

I don't think the employee should be taxed on interest accrued on an amount that was previously distributed. There are circumstances where the plan must continue to accrue interest on deemed distributions for plan reporting purposes, but when the participant terminates and their net benefit is paid out, the amount accrued on the deemed distribution is negated.

[Bird]

As mming notes, when a loan defaults, we are supposed to continue to accrue interest, but that just disappears when the loan is offset at time of distribution.

But honestly, several things confuse me - how does a participant take a distribution of 50% of a loan? And how is a loan a liability of the plan? And what do you mean by the recordkeeper "charged" interest on the entire loan - you mean that's included in the taxable amount?

[Guest smscottish]

To answer query of how take a 50% distribution -- I meant that a year before the employee left she defaulted on 50% of the loan and the record keeper sent her a 1099 for that amount as a distribution. However, when she terminated employment 18 months later and the rest of the loan was defaulted, the recordkeeper is showing interest oweing on the default amount of the entire loan up to the date of termination.

Secondly, the record keeper is saying that even tho there has been a default of the loan--until there is actual distribution from the plan, the loan is a liability of the plan--therefore it does not show as a debit to her vested balance, again UNTIL total distribution.

Thoughts???? Thanks

[Bird]

Well, I've never heard of defaulting on half of a loan, nor have I heard of a participant loan being a liability of a plan, and I don't like to speculate on things I've never heard of so I can't help. Sorry.

[WDIK]

Well, I've never heard of defaulting on half of a loan

My neighbor defaulted on half of their mortgage. Now they can only use the 2nd floor of their home. They have to use a ladder to climb out the bathroom window whenever they want to leave.

(Do I really need to say, "Don't take this post seriously"?)