Loan offset 1099 dispute

[Guest Whatup]

What recourse does the participant have for the following:

Plan allows for loans to be repaid by terminated participant. Participant made erradic payments through the course of the loan due to financial issues but felt they never were in default by more than 3 months

Participant paid the plan for the loan in the first quarter of 2004. The participant was not sure of an exact amount to repay the loan because he never received an annual valuation or a payoff amount. After several unanswered requests to the plan administrator for the payoff amount the participant made a calculation of what he thought the outstanding amount was, paid it, then rolled over the balance into an IRA.

2 years later the participant receives a 1099 for interest on the loan. The participant argues that if there were a loan offset it would have been in 2004, and so the 1099 should be corrected. He also raises the issue of never receiving a payoff amount after several requests from the plan admin, or an annual valuation to make certain the balance was paid in full.

What should the participant do about the 1099 for 2005? Does he have any cause for legal action against the plan administrator?

[Guest Veggietater]

Not sure what significance you think three months has with respect to default.

A plan is not required to offer a grace period for repayments, although the longest possible grace period they can offer is the end of the calendar quarter following the quarter in which the missed payment was due.

It's possible that the participant's attempted payoff in 2004 paid off all installments due up until 2005, so that the plan administrator was correct in issuing the 1099-R offset in 2005, not 2004.

Participant had a legal right to obtain a statement of benefit under the plan (which probably would have showed your outstanding loan balance). If the participant didn't get one after repeatedly requesting it, the plan administrator could have been subject to fines under ERISA for failing to provide a statement of accrued benefit upon request. (A request in writing to the Plan Administrator, certified return receipt would have helped here).

However, if I were the participant, I'd file a formal claim with the plan administrator (at the address for claims in the SPD), and see if they will fix the 1099-R problem. (Again send certified return receipt so that they take your inquiry more seriously). State that they were required to provide you with a 402(f) notice since the offset was an eligible rollover distribution under 402© (see IRS regs under 1.402©-2, A9) and they should realize you know your rights and that they were required to provide you with notice before offsetting your loan. Hopefully they will be nice to you from that point forward.

If not, I would lob a call into the local DOL office and see if they can get one of their guys to give the plan administrator a call. DOL audits scare most plan administrators.

Hope this helps. Good luck.