defaulted loan due to rejection of payments

[WCC]

Hello,

Here is the fact patter:

• participant takes a loan
• loan payments are withheld according to amortization schedule
• loan paments are sent to the recordkeeper timely

This is where it gets interesting:

• recordkeeper rejects the loan payments (recordkeeper is the one who produced the amortization schedule and promissory note). the rejected loan payments are sent back to the sponsor and this goes on for two years (payment and rejection) and no questions are asked by the sponsor or the recordkeeper as to why their deposits don't add up. Plan sponsor thinks it must be some sort of fee rebate or something....
• participant receives a 1099 for the defaulted loan balance two years ago. The participant just thinks this is normal and does not question the 10% penalty or the taxable amount.
• sponsor then figures out what is going on and makes a deposit for all the loan payments that were rejected and sent to the sponsor. We have late deposit issues and we can deal with that.

The issue now seems to be a double taxation scenario (I understand the loan "double taxation" argument and am not asking for that to be debated again). I am saying that a 1099 has been issued and after the issue date now all the loan payments have been deposited.

Question: My solution is to prove to the recordkeeper that loan payments were withheld and sent "timely". The recordkeeper should then issue a revised 1099 showing that there was no taxable amount. Based on the fact pattern, would you agree with that solution?

Thanks

[Bird]

Question: My solution is to prove to the recordkeeper that loan payments were withheld and sent "timely". The recordkeeper should then issue a revised 1099 showing that there was no taxable amount. Based on the fact pattern, would you agree with that solution?

Yes. Sounds like fun/good luck.

[MoJo]

I would also agree - and then go find another recordkeeper....

[BG5150]

Was there a TPA involved along the way?