Participant Loan

[Guest DNH]

If a participant had a o/s loan whose last payment was 9/06 quarterly payments so then with "cure period" rules, loan would be a deemed distibution as of 03/31/07. I just found out that 1) no payments were made for entire 2007 calendar/plan year and 2) participant just paid entire o/s loan amount plus accrued interest from 9/06 to 07/08. Also no excise penalty tax as it ws not a PT. So my Question is: Because his basis increased, I'm confused as to the amount actually taxable to him and must it be taxable for the 2007 year? Would appreciate replies. Thank you. DNH

[Guest Sieve]

Loan should be deeemed distributed as of 3/31/2007, and 1099-R should be issued for 2007. Amount of the deemed distribution (shown on 1099-R) that was paid back is treated as basis in his account, and will not be taxable when eventually distributed. If it can be shown that cessation of loan repayments was not his fault--i.e., software or payroll or TPA glitch--you could go in under EPCRS to correct (although the correction--loan repayment--already has been made), which would eliminate the 1099-R entirely and would also eliminate the need to track basis (because there would be no basis).

[Guest DNH]

Loan should be deeemed distributed as of 3/31/2007, and 1099-R should be issued for 2007. Amount of the deemed distribution (shown on 1099-R) that was paid back is treated as basis in his account, and will not be taxable when eventually distributed. If it can be shown that cessation of loan repayments was not his fault--i.e., software or payroll or TPA glitch--you could go in under EPCRS to correct (although the correction--loan repayment--already has been made), which would eliminate the 1099-R entirely and would also eliminate the need to track basis (because there would be no basis).

So I'm thinking since he paid it back with interest to just ignore it................ is that too aggressive? Opinion please. Thanks again for responding. DNH

[Belgarath]

Yes, that would be too aggressive.

[Guest Sieve]

Too aggressive. You still need to issue a 1099--the loan was a deemed distribution--and you still need to track basis. You don't have an unusual set of facts--it happens often--but that doesn't mean you can ignore the consequences of those facts.