Loan #2: took too much

[doombuggy]

Participant in her own plan requested a loan in April 2009 for $25,000. We told her she could only take $20,000, due to the fact that she had had another loan in the previous 12 months. She already took the money anyway, so we gave her a deemed distribution of $5000. She received a 1099-R for this in January. I thought her loan should then be set up for the $20,000, with her taking the extra $5000 as a distribution when doing the 2009 annual valuation. Boss disagreed with me and had me set up the loan for $25,000. The participant was supposed to make 3 quarterly payments in 2009 and 1 in 2010 to pay the loan off. We FINALLY received all the data to complete this val last week (she's under $250k so no EZ) and she indicated that she only made a payment of $1500 (her quarterly payments were at least $6k each). She made this payment in the 3rd qtr of 2009.

The loan is now in default, but needs to wait for a distributable event to offset. It will continue to accrue interest. The problem is that now my boss thinks we should have the loan as $20,000, not $25,000, and apply the payment of $1500 to that lower number, since she received the deemed distribution of $5000.

What are your thoughts on which way is correct?

As an added bonus, the loan was taken out so that she could help her husband buy a car (he is not in the plan, not an employee of the company). He was supposed to be paying it back. Guess what - they are getting a divorce...

[PensionPro]

Have you considered VCP? RP 2008-50, Sections 6.02(6), 6.07, 12.02(3).

[QDROphile]

Have you considered prohibited transactions?