loans:deemed distributions on a takeover plan

[Lori H]

trying to determine correct procedure on the following: a 401(k) had two participants with outstanding loans. they received hardships in may 2005 and discontinued making payments on their loans as well. the tpa at that time nor the financial manager advised the client of the deemed distribution that would occur. in dec 05, the plan changed tpa's and it was discovered in march when doing the 2005 py admin, the participants had deemed distributions on their loans. should the plan sponsor issue 2005 1099-r's to the participants and have them refile their tax returns or what would be the consequences of issuing 2006 1099's?

[ERISAnut]

I would default them asap. Technically, they should've became taxable in 2005; but there is not an auditor at the IRS that would knock the plan in the event of a late default; since it did become taxable.

While IRS auditor do look for taxable events upon audit, there is nothing flagrant about a late default. They would likely spend more resources to no avail since the loan is already defaulted. I would simply default asap.