Ineligible Loan Permitted

[Dazednconfused]

Plan does not allow for loans, however, participant (HCE) took one anyway, was not discovered until the yearly valuation completed. I would consider this an ineligible distribution rather than a deemed distribution, since loans not allowed, so what corrective steps would be needed, that is which correction program would I use to right the ship.

Thanks

[Guest Sieve]

This is right up the VCP alley--although the fact that the loan was to an HCE may complicate the typical VCP slam dunk a bit. But, if you retroactively amend the plan to permit loans, and submit under VCP, everything should be cool--although, being that it's late & I'm almost falling asleep, I've not looked at EPCRS to see if there's any provision about correction issues when only HCE loans were inadvertently (?) made.

And, if a loan was made and the TPA did not know about it, I'd also be concerned about other things not done properly--level amortization, payments at least quarterly, maximum loan amounts, etc., etc.

[Dazednconfused]

This is right up the VCP alley--although the fact that the loan was to an HCE may complicate the typical VCP slam dunk a bit. But, if you retroactively amend the plan to permit loans, and submit under VCP, everything should be cool--although, being that it's late & I'm almost falling asleep, I've not looked at EPCRS to see if there's any provision about correction issues when only HCE loans were inadvertently (?) made.

And, if a loan was made and the TPA did not know about it, I'd also be concerned about other things not done properly--level amortization, payments at least quarterly, maximum loan amounts, etc., etc.

Thanks! Well, no schedule was made, pretty sure no payments were made (withdrawal over one year ago), just a nightmare. So is VCP still an option?

[Guest Sieve]

Yes, but amendment then will allow loans for all. If no payments have been made on this loan, then you may also be able to correct that under VCP if the error was not due to the employee--e.g., payroll or TPA screwed up. In that case, a reamortization of the loan can be requested as part of the correction process (to repalce immediate issuance of a 1099-R). Check Rev. Proc. 2008-50 for details.

[Dazednconfused]

Thanks again! I will look into.