Plan Loans

[Guest Frank Jackson]

I have a client that wants to use the proposed loan regulations for a loan repayment after default. I understand that the payment must be put in an after-tax source. Does the plan need to be amended to accomodate this source? (The plan does not have an after-tax source now) Should the withdrawl restrictions be the same as for the elective deferrals and company match that the loan originally came from or can it be only subject to the after-tax contribution rules? Does anybody know of any articles or regs that address this?

Thanks.

[KJohnson]

You may want to look at Notice 87-13. I believe this prevents you from setting up a special separate account or contract for a participant's after tax basis in this situation. Although issued well before the proposed loan regs, this Notice gives the example of the basis that would be created by the repayment of a taxable loan and specifically states that the basis must be reallocated back to the accounts to which the repayment relates rather than to a separate "after tax" account.

I believe there would then be a recovery of the basis based on the "exclusion ratio" in the Section 72 regs.

[Guest Frank Jackson]

Thanks for your response. This sounds like a recordkeeping nightmare. How are you following this process? How does it affect participant statements and participant taxation?