Defaulted Loan - 1099R incorrect

[Chalk R. Palin]

This error was just discovered (in 2011). A participant terminated in 2010 and was distributed his account balance (less loan amount) and he did receive a 1099-R for that amount. He walked away from the loan, so there was a default, but the default didn't get reported on the 1099-R. Rev. Proc. 2008-50 doesn't seem applicable where the participant has terminated - the correcting options don't make sense. So, is VCP really the answer? Or, is this just a matter of correcting the 1099R?

If the 1099R is "corrected," I guess the employer could pay the withholding or leave the withholding alone (even thought the latter doesn't seem correct).

Part of my confusion is that, from what I'm reading, the default should be an actual distribution as opposed to a deemed distribution.

[Tom Poje]

that would be my understanding. the person quit so there was a distributable event, in fact, there had to be as he received a distribution of other money.

therefore, it sounds like a bad 1099R.

(I suppose if you were real lucky the person quit in Oct. therefore, if the plan allowed a terminee to continue to make payments, the grace period for correcting thing wouldn't happen until 2011, so then the loan would default, but that scenario is probably unlucky)

it sounds like the person needs to correct the tax form for 2010 and include the loan balance.

[masteff]

Cheapest way out might be offering to pay for any tax prep fees for the participant's amended return and any resulting under-/late-payment penalties and interest.

[Chalk R. Palin]

I just received some new facts. Apparently the employee terminated but still is a participant. That is, he has not taken any distribution and still has a sizable investment account balance.

Looks like there should have been a deemed distribution in 2010.

Would VCP really have to be used? They qualify for SCP, it seems, so why bother with submitting anything (besides a 1099-r) to the IRS and dealing with a VCP fee? I don't think he received any distribution in 2010, so it would be a late 1099-R as opposed to a corrected 1099-R for 2010.

EDIT: Ah, I just saw that SCP is n/a for loan failures.