Defaulted Loan Reported as Deemed Distribution

[Übernerd]

Participant took a loan in 2011, but sponsor's payroll department never set up repayments. Recordkeeper has already deemed the loan and issued a 1099-R, so the failure has been "corrected" as far as they are concerned. But sponsor and participant wanted to reamortize the loan instead. Two questions:

1. Can the reported deemed distribution be undone at this point?

2. If so, does the correction need to be made under VCP? §6.07 of Rev. Proc. 2008-50 suggests that the only way to correct this failure without reporting it as a deemed distribution is to file under VCP--is that the correct reading? If so, I don't see that undoing the deemed distribution is worth it because the compliance fee will be prohibitively high.

Thanks for any insights.

Ü

[ETA Consulting LLC]

Technically, the deemed distribution was correct. The IRS has recently held the Participant is responsible for ensuring payments are made (e.g. Participant cannot should've expected payments to be deducted from pay checks and questioned it when it didn't).

Given this, I would say VCP to attempt to get the loan (un-defaulted); since the way it was done was 'technically' correct.

Good Luck!