Loan defaulted in 2008; termination later in 2008

[Mr401k]

A 401(k) plan participant took a plan loan in 2005 and another in 2008. Later in 2008 he terminated employment. The plan's TPA did not advise sponsor to deem either loan. Very recently, in course of the plan's annual audit (first audit of the plan by firm), the loans were found and now need to be dealt with. Can the sponsor apply for a VCP under EPCRS to 1) deem the older loan so that it is taxable in 2011 instead of 2008, and 2) permit the participant to pay back the newer loan with accrued interest (it's still within its five-year window). I believe that such relief is ordinarily available (assuming that IRS consents to it, based on facts and circumstances), but a few have told that it isn't available in this case because the participant is terminated. I haven't found any mention of termination being a fatcor, but want to be sure.

Thanks for any help or insight you can provide.

[Mr401k]

Anybody?

[Tom Poje]

not an expert on loans, but it might hinge on the plan's loan policy. some do not permit loans once someone terminates, so paying back a loan, even if within the 5 year window might not be possible.

since you would go through VCP anyway, its going to be up to the IRS to decide if they accept whatever you propose.