Correction of Loan Failure through VCP

[12AX7]

Am I reading the Rev. Proc. correctly that if a loan has been deemed by a platform recordkeeper and a 1099-R is issued, the failure to repay the loan cannot be corrected through VCP?

The Rev. Proc. seems to address requesting relief from reporting, but as I strictly read the text it does not imply that the procedure would reverse a loan that has already been reported as taxable on a 1099-R.

Thanks.

[Lou S.]

Was the loan improperly defaulted? If not, I really don't see what there is to correct.

[ETA Consulting LLC]

The Rev. Proc. seems to address requesting relief from reporting, but as I strictly read the text it does not imply that the procedure would reverse a loan that has already been reported as taxable on a 1099-R.

Thanks.

I read it to suggest this:

Let's look at a hypothetical situation where a participant took out a plan loan in 2007 and made no payments since taking the loan. The participant has since terminated employment and taken a full distributions (let's say in 2010), but the outstanding loan was never accounted for. The "net affect" of this error is a plan distribution to the participant back in 2007 that was fully income-tax free. In this instance, since no 1099R was ever issued, you now have a proposed correction; the employer pays the income taxes with no additional 1099R reporting being necessary.

Let's suppose the recordkeeper has, in fact, issued a 1099R. In such even, this type of correction would not be needed.

I see it as a category of failures that typically occur where there has never been precedent on how to correct. Imagine going back to a form plan participant to explain they have "taxable income" from a plan loan taken 6 years ago.

Good Luck!

[12AX7]

The participant simply failed to make loan payments. I was looking at Page 165 of Rev. Proc. 2008-50 (yes, I know the new one is out, but have not yet fully reviewed it).

I was looking at specifically Section C1. Sorry if I didn't mention that earlier.

[ETA Consulting LLC]

I see. This appears to be under a "streamlined" filing where the employer is seeking relief from failing to report the loan "OR" relief in the form of not having to report the loan. If a Form 1099 has already been issued, this what type of relief is needed? "OR", if the 1099R had already been issued but you wanted to submit for another form of relief, then you'd have to do a long form submission detailing all events with your own proposed method of correction.

The streamlined approach is a box. Anything falling outside of that box, you'd submit the long form. In many instances, I submit the long form; even when the filing would fit 99% (but not 100%) of the action listed on the Schedule F.

Good Luck!

[12AX7]

ETK and Lou S: you are confirming what I believe is that the deemed loan cannot be reversed through the streamlined process. It seems that once the 1099-R is properly prepared, there is no recourse no matter what the circumstances under the streamlined process. I should have made that clear in the beginning.

[ETA Consulting LLC]

Correct.

[thepensionmaven]

Related question.

We just took over a profit sharing plan in which the owner took a loan in November, 2010, has never made any payments, but is in a financial situation to pay the entire loan back plus interest.

He has not filed 2010 or 2011 5500s, but we can address that under DFVC.

Since I have never dealt with this prior to this point, he's obviously defaulted on the loan in 2011 and should be issued a 1099R for 2011.

But, does the fact that he has defaulted negate the fact that he wants to, and is in a position to, repay the loan now with the interest owed?

Any suggestions are appreciated.