Defaulted Loan is a General Plan Asset

[Guest P Arpey]

Owner defaulted on a loan in 2004, but prior administrator didn't do a 2005 1099-R for the deemed distribution. Instead of correcting this failure by doing a 2005 1099-R I am going to do a 2009 1099-R and submit to IRS through VCP to request approval that the failure be corrected by doing a current year 1099-R.

Please keep in mind that I am in the process of revising the 8/31/04 plan year report and will then be doing the administration for the 2004, 2005, 2006, 2007 and 2008 plan years.

Since the loan is a general asset of the plan, I have been told that the deemed distribution must be allocated to all participants. Does this sound right? If yes, do I do this for 2005 or for 2009?

[Kevin C]

Since the loan is a general asset of the plan, I have been told that the deemed distribution must be allocated to all participants. Does this sound right?

No, that does not sound right. The participant who defaulted on the loan has the deemed distribution.

1.72(p)-1, Q&A 4, Example 4. (i) On August 1, 2002, a participant has a nonforfeitable account balance of $45,000 and borrows $20,000 from a plan to be repaid over five years in level monthly installments due at the end of each month. After making monthly payments through July 2003, the participant fails to make any of the payments due thereafter.

(ii) As a result of the failure to satisfy the requirement that the loan be repaid in level monthly installments, the participant has a deemed distribution. See paragraph © of Q&A10 of this section regarding when such a deemed distribution occurs and the amount thereof.

[rcline46]

Check the document under the loan provisions. Most documents state that the loan is treated as an investment of the participant taking the loan only (a 'self-directed' investment).