Loans

[Alex Daisy]

A terminated employee has an outstanding loan. They elect to leave their account balance in the Plan and not take a distribution.

How do I handle the outstanding loan balance.

Is it Deemed or Deemed with Offset?

Can you explain both options?

[QDROphile]

Normally a plan loan that that has missed payments and is beyond all cure or remediation periods is treated as an offset distribution if the participant is entitled to a distribution. Check the plan documents. Many variations are possible.

[austin3515]

When somoen incurs a distributable event, like termination of employment, the loan is offset. That means is treated exactly like a real distribution from the plan. It's reported as a real distribution on a 1099 (NO Code L), and it's reported as a distribuion on the 5500 (not a deemed distrbution). The loan is considered repaid, because the participant's account was reduced (i.e., offset) by their outstanding loan balance. Remember, the participant loan is part of their account balance, so making the loan go down to zero does mean something. Think of the pooled accounting days when the loan was just a part of the pool of assets. Johnny had a statement saying he had $50,000 in the Plan, and Johnny also had a loan out for $5,000, which was not broken out separately on his statement. The $5,000 loan was an investment under the plan just the same as any other mutual fund. So when he terminated, and his account was reduced (i.e., offset) by $5,000, and he only got paid $45,000, it's a lot easier to see how this is considered repaying the loan.

A loan deemed distribution is a loan that was treated as distributed for tax purposes only. So for example, a $60,000 loan would be a deemed distribution. The loan is still outstanding, and must still be repaid, even though the entire amount was taxable. Also, the 60K will continue to be counted in future a max loan calculations. Compare this with above, where if the participant was rehired, the "old" loan would be ignored.

[K2retire]

When somoen incurs a distributable event, like termination of employment, the loan is offset.

If that is what the particular document calls for. Not all of them require a loan offset until the distribution is actually made. In that case, if the former employee keeps making the payments, there should be no distribution -- deemed or otherwise.

[austin3515]

OJ, Assuming the document provides that the loan is due immeidatley on termination of employment (which most documents do), then apply what I said. We have one plan out of hundreds that's written that particular way, because really, who wants to collect loan payments from terminated empoloyees.

[K2retire]

I agree that it is rare -- but you still have to check the document.

[Alex Daisy]

When somoen incurs a distributable event, like termination of employment, the loan is offset. That means is treated exactly like a real distribution from the plan. It's reported as a real distribution on a 1099 (NO Code L), and it's reported as a distribuion on the 5500 (not a deemed distrbution). The loan is considered repaid, because the participant's account was reduced (i.e., offset) by their outstanding loan balance. Remember, the participant loan is part of their account balance, so making the loan go down to zero does mean something. Think of the pooled accounting days when the loan was just a part of the pool of assets. Johnny had a statement saying he had $50,000 in the Plan, and Johnny also had a loan out for $5,000, which was not broken out separately on his statement. The $5,000 loan was an investment under the plan just the same as any other mutual fund. So when he terminated, and his account was reduced (i.e., offset) by $5,000, and he only got paid $45,000, it's a lot easier to see how this is considered repaying the loan.

A loan deemed distribution is a loan that was treated as distributed for tax purposes only. So for example, a $60,000 loan would be a deemed distribution. The loan is still outstanding, and must still be repaid, even though the entire amount was taxable. Also, the 60K will continue to be counted in future a max loan calculations. Compare this with above, where if the participant was rehired, the "old" loan would be ignored.

How is a Deemed loan counted on a 5500?

[Mike Preston]

Since it is only a "deemed" loan (no actual release of accrued benefit takes place), it is included in the assets on the 5500.

[Alex Daisy]

What if a distributable event occurs, such as termination of employment, but the participant elects to keep her account balance in the Plan.

The Loan is in default and something must be done.

Is this a Loan Offset or a Deemed Distribution?

[QDROphile]

Your latest question was already answered.

[Mike Preston]

Agreed. See the message from Austin.

[Tom Poje]

how to handle the loan on the 5500 depends on whether the loan is 'self-directed' or not

According to the ERISA Outline Book 2008 edition

7.Form 5500 reporting requirements on defaulted loans. With the issuance of the revised Form 5500 series, effective for 1999 and later reporting years, the government provides more explicit instructions on how to report participant loans that have been deemed distributed under IRC §72(p) because of default.

7.a.Earmarked loans from defined contribution plans. The following reporting requirements apply if: 1) the loan is treated as a directed investment solely of the participant's individual account (i.e., earmarked loan), and 2) as of the end of the plan year, the participant is not continuing repayment under the plan. The deemed distribution under IRC §72(p) is reported on line 2g of Schedule H (large plan filers) or Schedule I (small plan filers). The loan is not reported on Schedule G as a loan which is in default or is uncollectible. In the year the deemed distribution is reported, the participant loan is included in the beginning-of-the-year assets (column (a) of line 1 of Schedule H or I) but not in the end-of-the-year assets (column (b) of line 1 of Schedule H or I). For subsequent years, the participant loan is not reported as part of the plan's assets, unless the participant later resumes repayment of the loan. If repayments resume in a later year, the loan must be restored as an asset in column (b) of line 1 of the Schedule H or Schedule I, and the amount reported on line 2g for the earlier year must be subtracted from the amount otherwise to be reported on line 2g for the year the repayment resumes (which might be a negative number, as a result). Note that although an unpaid participant loan might no longer be reflected in the plan's assets for Form 5500 purposes, the loan is still considered to be outstanding for purposes of applying the loan limits under IRC §72(p)(2)(A). In addition, the instructions caution that the loan is also considered outstanding for other purposes, such as the qualification requirements of IRC §401, including the determination of the top heavy status of the plan under IRC §416. For example, to calculate a plan's top heavy ratio, the value of a participant's account must include the value of an outstanding loan which is in default and has been deemed distributed under §72(p), until the loan amount is actually offset, even though the loan no longer appears as part of the assets for Form 5500 reporting purposes after the year in which the deemed distribution is reported. See Part E.2.d.1) of this section for a discussion of other purposes for which the value of the defaulted loan remains relevant until there is a loan offset.

7.b.Reporting rules for other loans. For participant loans that are not earmarked loans under defined contribution plans, as described in 7.a. above, including loans under defined benefit plans, a deemed distribution on account of default is not reported in line 2g of Schedule H or I. Instead, the unpaid loan balance, as increased for accrued interest, continues to be reported as a plan assets, both in the beginning-of-the-year asset column and in the end-of-the-year asset column on Schedule H or I, until the loan balance is actually offset. In addition, the loan is reported on Schedule G as a loan which is in default or is uncollectible. In the year of the offset, the loan is reported as an actual distribution from the trust and is not included in the end-of-the-year asset column on the Schedule H or Schedule I submitted with the Form 5500 filed for that year.