Defaulted Loan - 1099R Never issued

[Guest JDK]

We acquired a case in 2007. We ended up being responsible for the 2006 valuation. In doing the valuation it was discovered that a participant had an outstanding loan when he teminated and received a distribution of his vested account in 2006. The vendor distributed the participant account but did not default the loan. The 1099R reflected "code G". The defaulted loan has not been reported on a 1099R and is still showing as an asset in the plan. What is the best way to correct this situation? Do we have the vendor default the loan now in 2008 and issue a 1099R or go back and have the loan defaulted in 2006. Any and all guidance would be appreciated.

[Bird]

How about defaulting it in 2007 as a compromise? That 1099-R would be due the end of this month. I think the "correct" answer is to do it in 2006 but...that would be a nightmare for everyone involved. Accrue interest through 1/1/2007 so if the plan is audited you can say "see, the participant had more taxable income so there was no benefit to him by deferring the default by one year."

[KateSmithPA]

We have a similar situation to this. We recently took over a plan. There are 4 loans in default, dating back to 2007 and 2008. We do not know if 1099's were issued, or not.

If they were not issued as they should have, what is the correction?

Thank you.

Kate Smith

[Tom Poje]

EPCRS 6.07(1)

...as part of VCP the deemed distribution may be reported on Form 1099-R with respect to the affected participant for the year of correction (instead of the year of the failure). this relief..only applies if the Plan Sponsor specifically requests such relief.

since its part of VCP I'd think the IRS would tell you the rest of what happens.

[Kevin C]

If you can re-amortize the loans, you can request that the loans not be taxed. But, EPCRS says you have to request it to get it. I just finished up a VCP filing that did so and they granted the request.

[KateSmithPA]

Thank you. We will look into VCP. I forgot to mention the participants were all terminated.

[Lori H]

If you can re-amortize the loans, you can request that the loans not be taxed. But, EPCRS says you have to request it to get it. I just finished up a VCP filing that did so and they granted the request.

Are you saying that EPCRS let the participant re-start payments on a defaulted loan?

[Guest Sieve]

EPCTRS allows reamortization to the end of the original 5-year period. But, you have to demosntrate that the default was not the fault of the employee.