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Loan defaulted & he wants to start repaying again...


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So the plan contact had an outstanding loan that he received a 1099R for in January from American Funds, as he was not making loan repayments. Apparently (he says) when the plan moved over to my new employer and to a new carrier (AF), "somehow the loan repayments for me stopped" and for another person he mentioned. He wants to know if he can start repaying the loan. My answer would be no, since he received the 1099 already and the info was submitted to the gov't back in February; I don't think there is a way to "undo" the default...or is there?

QKA, QPA, ERPA

 

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The tax code considers the loan to be outstanding until "actually" distributed (offset in a distribution). If correction is not possible under EPCRS because of the circumstances, the loan may not be able to be rehabilitated to its original tax status ("undo the default"), but if the loan is still outstanding the borrower can continue to pay the loan. The payments will create basis in the account. You need to determine if the Form 1099 reported a deemed distribution or an offset distribution. You should also consider what EPCRS has to offer.

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Hard to know for sure - chances are he's screwed. While RP 2013-12, Section 6.07(3) provides for relief if you go through VCP, it sounds like this was a prior employer? Odds are good that perhaps the prior employer's plan provided for acceleration of the loan upon termination of employment? Unlikely that the prior employer will be willing to do a VCP filing in this situation. Obviously I'm just guessing here, as there are a lot of unknown details. Unless an employer/Plan Administrator who was obligated to handle this differently failed to do so, odds of a correction seem small.

Was this some sort of business/plan merger? That might make a difference in who was obligated to do what. Was the loan actually rolled over/transferred to a new plan?

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