Can a defaulted loan satisfy a minimum distribution?

[Guest Frank Jackson]

Can a defaulted loan be used to satisfy a 70 1/2 minimum distribution for a terminated participant? Any regulations you can reference would also help. Thanks!

[Dan]

I would say no because a deemed distribution in not really a distribution from the plan. It is just a distribution for IRS tax collection purposes.

The plan must still maintain the loan balance (and accrue interest) until a distributable event occurs. Then the loan is treated as distributed from the plan along with the other distributed benefits. But since the 1099 was issued on account of the deemed distribution, it is not re-issued and the accrued interest basically disappears.

[Guest Luci]

I would say yes since a distributable event has occurred-the 401(a)(9) event. Therefore the actual promissory note could be distributed. (I'm assuming what you are saying is that the default has just occurred.)