Who is responsible to deem a participant loan?

[Guest CJJ]

For most of the retirement plans that we administer, our role is that of a directed trustee. During my recent audit I have come across an issue with participant loans that are past due. As directed trustee, we notify the Plan Sponsor and request guidance on whether they need to be deemed. We have several plan sponsors that simply will not respond to our repeated requests. Since we are not receiving direction from the plan sponsor, the operations area takes no action.

As an auditor, I am wondering who is ultimately responsible for deeming the loan. From what I have researched and found, as a directed trustee we are required to follow the direction of the plan sponsor/administrator, and at the same time follow the plan documents. Several of these loans are more than a year past due. From an IRS perspective, I would presume the applicable 1099 should be filed within the tax year that the loan was deemed.

Do we, as directed trustee, have the authority and responsibility to deem past due loans? Any guidance is appreciated.

[ERISAnut]

No, you're fine. This is an operational issue that generally lies on the Plan Administrator since it is the plan adminstrators responsibility to operate the plan according to the terms. As Trustee, you have a fiduciary duty to ensure the participants "rights" under the plan aren't violated (i.e. plan administrator wants to take a participants account because the participant didn't show up to the Christmas party). This statement is said lightly and not to be antagonized based on the fiduciary responsibility of the plan administrator.

What the IRS will do is treat the loan as taxable upon audit regardless of who did what (which led to the participant not knowing). Of coarse, the 10% excise penalty will apply and the partipant (no matter how irate) will have the costs. As directed trustee, you really have no way of knowing if there is an allowable delay which would prevent the loan from defaulting such has out of work on temporary disability for a year or Hurricane Katrina. All you know is that the payments are in arrears and you have informed the plan sponsor of that fact.

You're fine on this one.

As a rule of thumb, the DOL will generally audit for participant rights violations (which if you know something about that then you will have reason to worry) and the IRS will audit for taxable events such as loan defaults (which are generally out of your control as directed trustee). Again, these statements are made lightly in order to provide a mindset and not to be antagonized to the full letter of the law.

[Guest CJJ]

Thanks for the help. It is greatly appreciated. I guess I will back off on this one and just make sure that we are doing as best we can.

Thanks again.

[E as in ERISA]

Deeming is a 1099-R issue. The payor (often the directed trustee) generally assumes 1099-R responsibility. But this is not a 1099-R for actual distributions. Only taxation of amounts deemed distributed. What is your agreement with the plan administrator in that regard?

[ERISAnut]

Deeming is a 1099-R issue. The payor (often the directed trustee) generally assumes 1099-R responsibility. But this is not a 1099-R for actual distributions. Only taxation of amounts deemed distributed. What is your agreement with the plan administrator in that regard?

"Deeming" is more of a plan operation issue as there are some allowable exceptions to the making timely payments that only the plan sponsor would be aware of. When a loan is deemed a distribution for not meeting the exceptions outlined in 72(p), then it becomes taxable. Once it becomes taxable, then it becomes a 1099-R issue as this is how it gets reported.

[Guest Pensions in Paradise]

ERISAnut - on what basis do you make the statement that the directed trustee does not have to report a defaulted loan? The trustee is aware that loans are in default, and the plan document specifies the default rules. The trustee is responsible for issue 1099s. So help me understand your logic on this.

[E as in ERISA]

And we understand that the trustee is not in full control of all the facts to make the determination on deeming. But the trustee probably has 1099-R responsibility. So it's a grey area. The trustee should do something more than sit back and wait for employer instructions if it wants to make sure it doesn't get hit with 1099-R penalties.

[wsp]

The trustee should do something more than sit back and wait for employer instructions if it wants to make sure it doesn't get hit with 1099-R penalties.

Most of the ones I deal have become comfortable with doing exactly that. Though they do send out the constant (2-3x's a year) notice saying these loans are in default status and request clarification or post it in bold print on the webpage....so I would say their argument is that they are trying to get the instructions.

[E as in ERISA]

And since its a grey area, that's a tenable position. I have a concern about any statements suggesting that the directed trustee has no responsibility and that its solely the plan administrator's issue. The better answer is that there is some risk. So it's best to be doing something.

[Mike Preston]

Count me on the side of those who believe the directed trustee that does nothing more than notify the plan administrator of the potential default is at risk.

Let's start with a threshold question: are the loan provisions available to the directed trustee? Outside the ERISA area, a directed trustee would be hard pressed to make a loan without seeing a copy of the documentation and maintaining a copy in their files.

If we assume that the directed trustee has a copy of the loan, then I think the Trustee is required to apply to provisions in the absence of intervening instructions to the contrary from the plan administrator.

I say the directed trustee should notify the plan sponsor of impending deemed distributions and follow through, including the issuance of 1099's, unless they get instruction to the contrary from the plan administrator.

[Guest Bizitchie]

What about the same circumstances but custodian? The participant is the employer (sole proprietor) with the unpaid loan.

[FormsRstillmylife]

Does the custodian have contractual authority to file the 1099R? If it files the 1099R's per direction from someone else per its service contract, it can notify that person and await instruction.

Generally, a custodian is at least a full step down from a directed trustee. Per its service contract, there should be no authority or ability to act in the absence of direction from the trustee or plan administrator; therefore, there should be no legal liability to act. In theory, it lacks sufficient information to act, the trustee could be depositing loan repayments in another account held by the trust.