Defaulted loan, deemed distribution, then rehire

[Spencer]

Question 1

We are performing an audit for a large plan with loans. Participant with loan terminated employment in 2009, defaulted on loan in 2009, and was issued a 1099R for 2009. Participant did not receive a distribution of his remaining account balance so loan was not offset. Deemed distribution was not shown on the 2009 Form 5500. I know that the defaulted loan continues to be a plan asset as far as vesting, top heavy and qualification for future loans, but shouldn't it have been reflected on the 5500 for 2009?

Question 2

Participant was rehired in 2010. Still never took distribution. TPA is now showing deemed distribution on the 2010 Form 2010. Does it matter that the 1099R was for 2009 and the deemed distribution is being shown on the 2010 Form 5500? Also, still no distributable event so shouldn't the defaulted loan still be on the books for vesting, top heavy and qualification for future loans?

As always, thanks!

[Bird]

I think the answer to your questions is "yes" and yes, the 1099 and the 5500 should show the default in the same year.

[QDROphile]

Please explain why the loan was not treated as an offset distribution after termination of employment.

[Guest Sieve]

QDROphile -- Depends on the Plan's provisions. It will be an offset if the plan so provides, but will not if the plan doesn't provide & no distribution is taken. (See Reg. Section 1.402©-2, Q&A-9 Ex. 2(a),)

[QDROphile]

Examples 2 and 3 do not speak to the distribution/deemed distribution issue. Example 6 says that because there can be no distribution, the loan cannot be offset. That suggests to me that maybe any time there is an offset, there is a distribution. I realize that the examples do not zero in on the specific issue, so we do not have an answer in that regulations. The last sentence of Q&A-9(b) suggests that offset and distribution are not inextricably linked. I would accept the answer that the plan terms do not provide for distribution of the loan unless other balances are also distributed (e.g the plan provides for lump sum distribution only). I would not desgn a plan that way. Maintaining loans after a deemed distribution is an administrtive burden. Among other things, the plan can end up with after-tax amounts.