Loan Default, Deemed Dist'n, Ongoing Repayments?

[Guest Iwonder]

Participant stopped making repayments to the plan about a year ago. Now, Plan Administrator has JUST determined that the loan is to be defaulted and a 1099 issued, but Plan Administrator is adamant that automatic loan repayments from the participant's compensation are to continue.

Once a deemed distribution occurs repayments can't continue to be made, can they?

[QDROphile]

If payments stopped, how can they be automatic? Was there a fiduciary breach? Was there a bankruptcy?

Apart from those curiousities, the loan stays in place and payments after the deemed distribution are after-tax amounts.

Note that I am not saying anything about whether the participant can be forced to pay or be prevented from paying.

[JanetM]

The deemed loan is a defaulted loan that can not be offset. It stays on the books and counts toward future amount allowed for new loan if plan allows more than one loan. The amount can be repaid and it is, the amounts are put in after tax money type.

Curious how the participant stopped paying. Did they go out on medical, term for short period or what. By making payments via payroll deduction the participant can't just stop.

[Belgarath]

I believe that there is a fiduciary OBLIGATION to attempt to have the balance of the loan repaid. Certainly in a DB plan, or a DC plan with pooled funds, these are plan assets which should be repaid to the plan. On an individually directed account DC plan, this argument seems to make less sense, but I nevertheless believe that if push came to shove, the loan represents part of the participant's benefit, which the fiduciary has an obligation to preserve. I'm also assuming (and hoping for their sake) that the loan agreement does not provide that in the event of default, the repayment obligation is extinguished. I believe this could be determined to not be a bona fide loan, bringing in prohibited transaction/disqualification issues.

I have not personally seen any enforcement action on defaulted loans in this situation, so the above may be largely theoretical, but I think prudence dictates that the Plan Administrator's recommendation be followed, and I also believe it is the correct choice. I don't see any regulatory support for NOT getting it repaid

[Guest wespac]

Hello,

I see the same obligation to pay described in The ERISA Book on page 7.262.

But all the following examples illustrate situations where the deemed loan is eventually offset at the time if distribution – or offset by Match or PS monies in the plan that are not subject to the age 59.5 requirement for distribution of deferrals.

But I do not see any examples of actual loan payments being re-started after a loan is treated as a deemed distribution in The ERISA Book.

And when I am asking other TPAs–I am hearing that they are not actually telling sponsors that there is a continuing obligation to make loan payments.

In practice – what really happens?

What can we tell the plan sponsor that they should realistically do?