Loans: deemed distributions

[doombuggy]

I have moved to a new employer and was given a plan that has 4 possible loan defaults. One of the participants who was terminated, has taken a distribution this year and should be receiving a 1099-R for his defaulted loan.

One participant is terminated and did NOT take a distribution from American Funds, where the assets are held.

Two other participants have loans that have not had repayments made in 2012. I do not know if these participants are terminated or not, as we receive the census annually. It is possible that the employer has stopped sending in loan repayments (whether or not they are being withheld from the paycheck). No deferrals were made in 2011, not sure about 2012 (this is for the plan as a whole).

Should these three participants be receiving a 1099-R from American Funds for their outstanding loans in January?

[Tom Poje]

well, never sure if my brain is functioning at 100%, but as I recall...

assuming the plan is not pooled, because the rules are slightly different as I recall....

any one who has terminated has a distributable event, so loans are treated just like any other distribution. ha, watch you have a document that makes you wait until after the end of the year before you can take a distribution! and we will assume the people are beyond and grace period on the loan.

so, anyone who quit has a distributable event and gets 1099 R with whatever distribution code. it is not a deemed distribution, the person had a triggering event so an actual distrubution, even though you don't see it at this time.

anyone who is still active, has no distributable event, so now they have a 'deemed' distribution.

this also requires a 1099 R but you include L in the distribution code and report it on a different line on the 5500.

you also keep track on paper of the loan incurring interest, and if the person ever ever ever tries to take another loan it counts as an outstanding loan balance. my brain doesn't recall what happens if the plan only allows one loan at a time!

well, that is what my brain remembers.

or you could wait and see if those claiming the Mayan calendar end of the world is true and then the problem will go away shortly.

[david rigby]

any one who has terminated has a distributable event, ...

Don't forget that most plans say a participant who is rehired before the actual distribution no longer has a distributable event, or something like that.