Loan taken before Plan adopted a loan policy

[John Feldt ERPA CPC QPA]

The company owner took a loan out of their 401(k) account 9 months ago. No loan policy was adopted. The "employer checklist" attached to their document indicates that the plan will NOT provide for participant loans.

The IRS talks about discretionary and interim amendments and the deadlines that apply. However, isn't a participant loan more of a DOL issue - what is the timing requirement to adopt a loan policy? I believe it must be done before the loan is made, but I have not found the official cite for that.

Any guidance is much appreciated.

Oh, just for fun, as I'm sure you've guessed, the loan exceeded $50,000 and no payments have occurred yet. We are currently trying to find out if we could turn this into an in-service distribution, and deal with the tax withholding problem.

[Belgarath]

Assuming it can't be considered an in-service distribution, you might be able to correct this under VCP. Revenue Procedure 2006-27 allows, within certain parameters, a retroactive amendment to permit loans. There are also "fixes" for loans in excess of the statutory limits, and loans in default.

However, I'm not all that hopeful that the IRS would necessarily accept this, even under VCP. Given that it was to a HC, and there is no compliance whatsoever on any level, you may want to just look at the DOL's VFCP correction (and I don't currently have time to see if this specific situation is eligible for a VFCP correction.)

Good luck!