basis adjusment for loan repayment to Roth 401(k)?

[Guest riss@7477]

The Background

A loan from a 401(k) and subsequent repayment of the loan do not trigger tax consequences unless it is deemed distributed, e.g. because it failed to meet the requirements of §72(p)(2).

When a loan (or portion of a loan) is deemed distributed the participant is taxed on that portion of the loan (to the extent it would have been includible in gross income under §72 had an actually distribution been made), but no basis is credited at that time. Basis is credited once repayments are made on previously-taxed loans. See Treas. Reg. §1.72(p)-1, Q&A-21.

The portion of a loan that is attributable to a Roth account will be treated as a non-qualified distribution even if the participant met the qualifying distribution requirements. See Treas. Reg. 1.402A-1, Q&A-11. As a result, the portion of the Roth loan that represents earnings will be includible in income at the time of the deemed distribution. When the loan is repaid, basis gets credited for the earnings portion that was previously taxed. See Treas. Reg. §1.72(p)-1, Q&A-21.

The Question

But what about the portion of the loan that was not included in income when the loan was deemed distributed (i.e. the portion that represented the after-tax Roth contribution)? Is it taxed again when it is repaid? Or is there basis adjustment when it is repaid?

[Bird]

I'd think it would go back in as basis. So, when a default occurs, the contribution portion is not taxed, but basis is reduced. So when/if it is repaid, it would increase basis.