401k Loan -No Payments Ever Made

[goldtpa]

EE took out 3K loan in 1999, never made any payments. The TPA was a payroll company. They never distributed the loan as a deemed distribution.

Do you go to the DOL's VFCP or IRS' VCP?

Assume that she borrowed 3k and was supposed to make weekly repayments totaling 1,000 per yr for 4 years. Also assume that the total outstanding loan balance as of today, using the original interest rate is 6k.

VFCP states that an acceptable restituition would be to restore the plan, participants, and beneficiaries to the condition they would have been in had the breach not occurred.

VCP will allow the plan sponsor to treat the loan as taxable in the year of correction, rather than when the violation of section 72(p) first occurred

Do you...

1. go to VFCP and give ee a 1099-R for 6K and have the er add 2k to ee's account, essentially making ee whole.

2. Go to VCP and giver her a 1099-R for 6K in 2006, rather than give her a 1099-R for the year in which the violation of section 72(p) first occurred?

3. Skip it all and just give ee a 1099-R for 6k and call it a day.

Thanks for the help.

[Guest mjb]

Why isnt the 3k loan deemed taxable in 99 or 00 when the distribution was deemed to occur under the IRC 72p regs? s/l on taxation would expire no later than 4/15/04. Doesnt seem legal to tax participant for 6k in 06 on loan that was imputed as income 6 yrs earlier because of failure by employer to report distributiion.

[goldtpa]

The prior TPA, which shares the same name as a 401(k) discrimination test, never deemed the loan as being taxable. Why I don't know.

Now I am trying to fix it. If the loan was less than 5 years old, we could re-amortize the loan over the remaining period. However since the loan is much older and the former TPA never did anything, what do you do to fix it?

1. Do you go to a correction program and if so which one (VCP or VFCP)

2. EE should get a 1009-R. How much should it be for?

3. Is the employer responsible for any portion of the taxes.

[Guest BXO]

Should TPAs, themselves, deem loans that are left unpaid? Aren't their circumstances where a loan may go unpaid for a period of time? Are you familiar with ADPs service agreement with its clients, and shouldn't your ire be directed at the plan sponsor?

[Guest BigBish]

While working for a large provider, I underwent this scenario.

1- Yes IRS VCP all the way whether the client wants to or not.

2- yes the loan is taxable in the year it should have been distributed. make your TRA pony up some $$ to pay for thier mistake. The participant will need to amend her taxes.

[Guest BXO]

Be sure to read Rev Proc 2006-27 before taxing a loan in the year it should have been distributed.

[goldtpa]

In reviewing 2006-27 its states, "The correction methods described in section 6.07(2) (b) and © and section 6.07(3) are not available if the maximum period for repayment of the loan pursuant to § 72(p)(2)(B) has expired."

Since this loan is more than 5 years old, I beleive the only option is to self correct. Distribute the 1099s in 2006 for the outstanding balance and see what happens.

I do agree that the prior TPA should pony up, however client would have to chase them down. That could take awhile.

[austin3515]

You're all better people than I am. 7 years ago?? Let it lie man!!