many loan violations

[Santo Gold]

Any comments are appreciated.

1) Participant took a loan from 401k plan 10 years ago, but plan did not allow for loans at that time (plan does allow for loans now). The participant has been making repayments the whole time.

** Since discovered now (2013), does the original loan amount (plus loan interest) become taxable to the participant in 2013 and considered a deemed distribution?

** Should the participant continue to repay the loan and if so, how is the repayment amount classified if the entire loan amount is taxable in 2013?

** Is this an VCP fixable violation?

** The loan repayments were established with a baloon payment, which is wrong. But since the loan should not have been allowed in the first place, what impact is there?

2) [Different participant, same plan] After a loan policy was adopted, the participant has taken 3 loans, all of which are still outstanding. Loan policy allows for only 1 loan at a time. All loan payments are current.

** Are the second and third loans an operation failure, considered to be deemed distribution and taxable now in 2013?

** Fixable through VCP?

Thanks

[Kevin C]

For situation 1, the scheduled balloon payment means the loan violated the level amortization requirement and was a deemed distribution 10 years ago when it was taken. See 1.72(p)-1 Q&A 4. I don't think whether or not the plan allowed loans at the time changes that. Unless the loan was for the purchase of the participant's principal residence, you are way beyond the maximum amortization period, so I don't think VCP is an option. See Rev. Proc. 2013-12, section 6.07 (2)(a).

For situation 2, VCP should be an option, provided you are not beyond the original maximum amortization period. The easiest correction would probably be to amend the loan program to allow 3 loans.