Plan Loans

[Gary]

One client had a plan loan with a balance of about 30k (after making some payments) and then discontinued paying off the loan. It was actually 15k for husband and 15k for wife.

The client than took an additional $60k for a total of 90k for the two participants, split 50/50.

The client did not pay anything on the 2nd loan.

As far as the rules go, I see these as deemed distributions subject to income tax and since under 59 1/2 the 10% penalty.

I can simply break the bad news to the client as it is.

Does anyone respond to a situation like the one above in any other creative way?

Finally, a separate client (one participant plan) took out 55k and defaulted on that loan immediately.

In this case it seems that we treat the 50k as a deemed distribution and since the remaining 5k is above the 50k limit it would be addressed as a prohibited transaction.

Since the employee has not reached the plan's NRA I don't see the extra 5k as a retirement type taxable distribution.

How have others addressed this type of situation in practice?

Thanks.

[QDROphile]

Consider in scenario #2 whether or not the plan is disqualified because the loan was merely a pretense (and a poorly exectued one at that) for a distribution that was probably not allowed under plan terms.

In scenario #1, possibly the same result for the same reason. What is the justification for another round of plan loans when the first loans are in default? I would be looking for the reasonable basis for expecting the loans to be paid.

[Kevin C]

Also, in scenario #1, the prior defaulted loan triggers additional security requirements for subsequent loans, if they are allowed. If they didn't meet those additional requirements, the second loans were not valid loans. 1.72(p)-1, Q&A 19 (b)(2).