Loan default, deemed, offset, tax withholding, balance payable

[TPApril]

Participant has terminated and has two outstanding loans – the first one defaulted in 2005 and was a deemed distribution with 1099 issued; second one is active loan until termination. Participant is taking cashout, so I’m trying to calculate both withholding amount and distributable amount after loan offset of second.

This is my calculation, any helpful thoughts?

General Account Balance (excluding loans) $50,000

Loan 1 - Defaulted with 1099 in 2005 $20,000

Loan 2 - Active Loan Current Principal $15,000

Interest on loan 1 accrued through default date (never paid or reported) $500

Interest on loan 2 accrued from last pmt to distribution date (never actually pd) $100

Subtract Loan 1 with phantom interest - already deemed $(20,500)

Total - Taxable Amount $65,100

Less 20% $(13,020)

Offset - Subtract Loan 2 with interest $(15,100)

Net Cashout Amount $36,980

[masteff]

I'd think the $500 which hasn't been reported on loan 1 would be taxable. (but then I'm not 100% up-to-date on the regs for reporting deemed loans)

Otherwise it looks fundamentally correct.

Your check figure is that net cash plus withholding equals cash available for distribution.

[TPApril]

Thanks for your response. I would make a correction to my first post - regarding defaulted Loan 1 - interest, as calculated from date of last payment to date of default, was indeed included in the 1099 in 2005. So I think no interest on that loan is taxable at this point (since interest calc'ed later is only used for future loan availability calcs).