In-Service Distribution Post Loan

[chris]

Participant is 63 years old. Participant just took out loan from 401(k) Plan and has made one payment. Participant now wants to take out entire account balance via in-service distribution provision as allowed by Plan terms. Appears participant does not have the ability to payoff the loan with outside funds. Plan doc is a Corbel document. Can the participant apply for the in-service distribution and state that Participant wants all monies in the account but also direct that the Plan treat the portion of the account equivalent to the outstanding balance of the loan as an offset? Thanks for any help....

[pmacduff]

Is there a reason that the loan balance cannot remain in the account and the participant continue to pay?

In other words, why does the loan have to offset/default?

[chris]

I guess that's a possibility assuming the participant will continue employment for a sufficient amount of time. Presumably, upon termination of employment, then loan will be dealt with at that time as determined under Plan terms...

[masteff]

If you're concerned that your plan doc suggests the loan should be offset upon a complete distribution (regardless of whether the participant is active or terminated), then if the participant has the option to take less than a complete, then simply suggest that he leave, say, $500 in the account to avoid the tax consequences of the loan being offset. This keeps the account and the loan intact.

[chris]

Plan document (loan policy) and note language provide for loan to be due and payable upon termination of employment. Both also contain the following language "In addition, any distribution (other than an in-service distribution) from the Plan will be first applied to offset any outstanding balance." I presume that language allows for the participant to take an in-service distribution and continue to keep the loan intact and continue to make payments given that the implication is that participant continues tobe employed.

I believe that would be the easiest, i.e., in-service distribution of account leaving loan intact and participant continues to pay. However, my question arises in the event the participant wants to handle the loan at the same time as the in-service distribution such that the account is cleaned out and the loan is no more...

[masteff]

Both also contain the following language "In addition, any distribution (other than an in-service distribution) from the Plan will be first applied to offset any outstanding balance."

You answer your own question... your plan says "other than an in-service distribution". In your scenario, you have no mechanism in your plan to cause a loan offset. The participant would have to do it in three steps: 1) distribution of available funds, 2) pay off the loan, 3) 2nd distribution of remaining balance.

From Reg 1.402©-2 Q&A-9:

"(b) Definition of plan loan offset amount. For purposes of section 402©, a distribution of a plan loan offset amount is a distribution that occurs when, under the plan terms governing a plan loan, the participant's accrued benefit is reduced (offset) in order to repay the loan (including the enforcement of the plan's security interest in a participant's accrued benefit). A distribution of a plan loan offset amount can occur in a variety of circumstances, e.g., where the terms governing a plan loan require that, in the event of the employee's termination of employment or request for a distribution, the loan be repaid immediately or treated as in default. A distribution of a plan loan offset amount also occurs when, under the terms governing the plan loan, the loan is cancelled, accelerated, or treated as if it were in default (e.g., where the plan treats a loan as in default upon an employee's termination of employment or within a specified period thereafter). A distribution of a plan loan offset amount is an actual distribution, not a deemed distribution under section 72(p)."

[chris]

I see what you are saying, but I am trying to see if there is a way to get there instead of having to go through three separate steps as outlined above. Plan loan policy also states regarding a default that the "Participant will have the opportunity to repay the loan, resume current status of the loan by paying any missed payment plus interest or, if distribution is available under the Plan, request distribution of the note. If the loan remains in default, the Plan Administrator will offset the Participant's vested account balances by the outstanding balance of the loan to the extent permitted by law. The Plan Administrator will treat the note as repaid to the extent of any permissible offset. Pending final disposition of the note, the Participant remains obligated for any unpaid principal and accrued interest." Assuming, participant does not want to keep loan intact, would alternative be for participant to default on the loan, let the cure period go by, and then request the in-service distribution of all of his/her account part of which would be the promissory note...? Thanks

[masteff]

I'll redirect you to the regulation I quoted and permit you to reach your own conclusion. When you re-read the next to last sentence, keep in mind that "e.g." means "for example" and is not an exclusive list of possibilities.

Of course the ability of an active employee to default on a loan is an entirely different discussion: http://benefitslink.com/boards/index.php?showtopic=39392

[ETA Consulting LLC]

decreased our line of credit to $800K from $1,500K.

Wondering if I can get them to "decrease" my assets in that fashion

[GMK]

um ... notice the classic "to" and "from" reversal