loan default

[thepensionmaven]

We just inherited a plan with an outstanding loan by the officer of the company.

The participant made one payment in 2011 and has not made a payment since; the prior TPA has not issued a 1099R.

We asked around at a few pension meetings and someone mentioned the possibility that the transaction could be handled as follows:

participant taxable in 2011 on the missed payments due in 2011

participant taxable in 2012 on the missed payments due in 2012

participant taxable in 2013 on the missed payments due in 2013.

Therefore, there would be 1099Rs in 2011-2013 only for the missed payments and these would be a code "1".

The participant has every intention of starting to repay the loan with the next quarterly installment.

This is a most interesting take on the situation and would appreciate any comments.

[BG5150]

I think the loan should have been defaulted at the end of the quarter following the quarter in which first loan loan payment was missed. Period.

Any loan corrections or modifications you want to do should be done under VCP, I believe.

[masteff]

We asked around at a few pension meetings

I only-half-tongue-in-cheek suggest you find new/different pension meetings to attend if that's quality of advice you're getting.

BG's correct. Although I wouldn't blame someone if they took the easier route of applying the default as of the first day of the current year. The participant can continue making payments but they'll be made on a defaulted loan which means they'll create basis which needs to be tracked in an after-tax source. Until repaid and/or otherwise offset, the defaulted loan will count against the participant's ability to take other loans.

[BG5150]

^^ And continue to be an asset int he plan until offset.