Loan Defaults on 5500

[Guest EdwardF]

Is the intent of question 27(B) of the 5500, asking if any loans by the plan are in default at the end of the plan year, to identify loans to participants that are in default - meaning repayment has not been received within the Plan's allowable grace period and required to be considered a deemed distribution?

[Guest EdwardF]

Does anyone have any feedback on this one. I have not been able to find any clear instructions answering if the 5500 question is referring to participant loans or loans from the plan to a third-party (non-participant)

[KIP KRAUS]

EdwardF:

I have always interpeted that question to apply to loans from the Trust to outside parties. I have never included Participant loans in that question, and have never had an auditor question it. However,I don't know of any sitation that specifically addresses that issue.

[BeckyMiller]

The DOL's chief accountant, Ian Dingwall has repeatedly stated that this does include participant loans and that for a 401(k) plan with participant loans the DOL expects to see this schedule attach. Default is very common on participant loans and 401(k) plans are not generally authorized to treat the defaulted loan as offset against the account balance until the participant attains a distributable event.

I was just working on the new Form 5500 series which includes substantial reductions in the amount of information required on the ERISA schedules. One of those changes is that loans in default no longer need to list participant loans which are secured by the participant's account balance.

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[This message has been edited by BeckyMiller (edited 10-01-1999).]

[John A]

I'm still a little confused on this issue. If a participant loan is within its grace period "as of the close of the plan year", then it is not in default, correct? If the participant loan has passed its grace period and is a deemed distribution, then the participant loan is not in default due to the deemed distribution, correct? So when would a participant loan be in default such that this question would need to be answered yes?

[lkpittman]

John A, it is my understanding that a loan is in default as of the date a scheduled payment is missed. The "grace period" is an allowable time period provided by the employer within which the default may be corrected prior to the loan becoming a deemed distribution under the proposed regulations.

Also, since a deemed distribution is not an actual distribution, the accrued benefit of the particpant still includes the value of the defaulted loan, plus interest which continues to accrue (until repaid or an actual distribution can occur). I think that it is still considered a defaulted loan and should be reported as such, even after the deemed distribution, although the accrual of additional interest each year does not constitute another deemed distribution under the proposed regs.

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LKP

[This message has been edited by lkpittman (edited 09-30-1999).]