Loans and Plan Termination

[Guest cgeslak]

Can anyone point me in the direction of something that says that if a loan is considered a deemed distribution but is due to termination of the plan, then the 10% penalty does or does not apply?

Thanks in advance,

Crystal

[namealreadyinuse]

I have never heard of that rule. Are you sure you heard it correctly?

[wsp]

Section 72(t) (which imposes a 10 percent tax on certain early distributions) applies to a deemed distribution as if the deemed distribution were an actual distribution. Reasons behind the need to deem the distribution are irrelevent and distribution needs to be processed as a normal distribution. Normal 10% exceptions apply. One of the possibilities that participants don't think about when they take out the loan.

[QDROphile]

You are probably not dealing with a deemed distribution. You are probably dealing with an offset distribution. The difference does not matter for purposes of your question. The 10% tax under 72(t) applies unless the loan is rolled over.