Participant Loan

[Guest Don J. Smith]

A participant terminated employment on 9/15/99 and stopped making loan repayments. The loan Balance at date of termination was $13,400.00 Payments were being made bi-monthly prior to termination. Interest was reducing each payment and was $53.70 the last payment date. We want to get this person paid out and handle this correctly. Plan calls for Annual Valuation. Plan has calandar year plan year. I feel that we should handle as follows please provide futher or corrective guidence.

1) Charge $53.70 interest for each pay period missed againt participants account until paid out.

2) Issue a 1099R at time of payout (or end of year?)

3) Try to get this participant to take his distribution ASAP. What do we do if he doesn't.

4) I don't think loan is considered in default for 1999 Form 5500.

Please give guidence!

[Guest JWBrown]

Your plan document, loan administration rules, or maybe the loan document itself should state what conditions lead to default and at what time the loan would be considered defaulted, after a participant terminates employment.

For example, our plans provide that an employee has until 6 months after termination to repay a loan, or at that time the loan is defaulted, and a 1099-R is issued for that year. During the 6-month period, the participant must continue to remit all of the payments that would have been due, but no less frequently than each calendar quarter.

At the same time, loans in our plan are not defaultable until the payments due for a calendar quarter continue to be in arrears by the end of the next calendar quarter, i.e. there's a rolling quarter grace period before default.

With your participant in my plan, the participant would have had to make sufficient payments for the third quarter of 1999 by December 31, 1999, or the loan would be defaulted (but in January, 2000, which would lead to a 2000 1099-R issued in January, 2001). Assuming the participant made the third quarter sufficient, then he would have until March 15, 2000 (6 months after the termination date) to make the fourth quarter (and the entire loan balance) sufficient, or the remaining balance would be defaulted.

Fun, fun, fun!

I hope you can find equivalent guidance from your plan materials to build a timeline.