In-Service to Offset Loan

[austin3515]

Participant is eligible for an in service distriubtion, and wants to offset his participant loan via an in-service distriubtion without actually taking the money out of the Plan. Can he just fill out an election form to that effcet? I know this is POSSIBLE, but does the document specifically need to allow this form of distribution?

[Guest Sieve]

I would think that the plan must contain appropriate language allowing a loan payoff with transfered amounts within a plan. You ought to be able to accomplish that by appropriately revising any stand-alone loan procedures.

For example, Corbel's loan procedures say this:

"The loan must provide at least quarterly payments under a level amortization schedule. Generally, the Administrator will require that the Participant repay the loan by agreeing to payroll deduction, payment by ACH (automated clearing house system for electronic funds transfer) or payment by check."

So, that ought to be changed to permit payment by transfer within the plan.

By my analysis, this would not a rollover, so 20% withholding will be required (i.e., to pay off a $40,000 loan balance, the gross distribution indicated on the 1099 would be $50,000).

[Bill Presson]

Participant is eligible for an in service distriubtion, and wants to offset his participant loan via an in-service distriubtion without actually taking the money out of the Plan. Can he just fill out an election form to that effcet? I know this is POSSIBLE, but does the document specifically need to allow this form of distribution?

Can he not just stop paying the loan and accomplish the same result?

[austin3515]

Bill, I had the same thought. But then let's say for example he wants another loan. Do we let him take it? I suppose the answer is yes because for him, the loan has been repaid via an offset, but I'm a littl iffy on the logistics.

But I also like the idea of amending the loan program to allow this. I've definitely read about this type of transaction somewhere so I know it's doable. I'm just a little iffy on the mechanics.

[Bill Presson]

Bill, I had the same thought. But then let's say for example he wants another loan. Do we let him take it? I suppose the answer is yes because for him, the loan has been repaid via an offset, but I'm a littl iffy on the logistics.

But I also like the idea of amending the loan program to allow this. I've definitely read about this type of transaction somewhere so I know it's doable. I'm just a little iffy on the mechanics.

But in your scenario, he doesn't want another loan. He wants inservice distributions because he doesn't intend to pay the loan back. Just amend the plan to allow for in-service and have him stop paying the current loan.

[austin3515]

I agree, today he doesn't want another one. But what about in a year? Or even 6 months?

[12AX7]

At this point, would it not be easier to just process the in-service distribution?