Loan to Plan Sponsor in 2005 - Still not repaid

[Guest notapensiongeek]

We administer a Title I 401(k) Plan where the plan loaned the plan sponsor (sole proprietorship) $78,000 back in 2005. We have filed Form 5330's for 2005, 2006 & 2007 and have accrued interest for those years. We have also reported the PT on the Schedule I (Form 5500) for 2005 & 2006. We haven't filed the 2007 Form 5500 yet but will do so by the 15th.

The plan sponsor has repaid about $2,000 of the loan, plus some of the accrued interest.

It could take several years for the entire loan and interest to be repaid. So do we continue to do what we've been doing (accrue interest, file 5330's, report on the 5500, etc.) or is there a point in time where we can distribute the loan? Or what are our other options (if any)?

Any input on this would be greatly appreciated!

Thanks!

[Guest Sieve]

If you default the loan, then you still have a PT which has to be corrected by the employer or else excise taxes continue to accrue. Changing the loan into a transfer of assets to the employer doesn't change this transaction into something other than the PT that it is.

I hope there are sufficient assets in the Plan that the IRS, on audit, doesn't say that the exclusive benefit rule has been violated. In fact, the longer this loan stays outstanding, the closer this comes to being a violation of that rule--it may have reached that point now.

I think you continue doing what you are doing, and hope that the employer repays the loan and gets this mess behind him/her. You also need to impress on your client in the strongest terms that not repaying the loan very quickly will result in the disqualification of the plan--a disqualification that is not correctable (i.e., exclusive benefit rule violation).

[GBurns]

What is a Title I 401(k) ?

[Guest notapensiongeek]

Thanks for your input, Larry.

When I said "Title I" I meant that it is a 401(k) Plan that is subject Title I of ERISA (i.e., it is not a 1-participant plan).