Can a terminated participant take a distribution and then payback loan?

[Spencer]

I have a new takeover client. In inital review of the plan I noticed that a terminated participant has a defaulted loan. I send client financial institution paperwork to process deemed distribution. Client asks if particpant can take lump distribution and then pay back outstanding loan balance. Particpant is over 60 so no penalty for early withdrawal. He is trying to avoid taxable income of loan.

thoughts?

[ETA Consulting LLC]

Sure, he can take a 'taxable' distribution and pay the loan off. He'll be taxed on the distribution instead of the loan. No problem.

Good Luck!

[ForksnKnives]

You're talking about robbing Peter to pay Paul. The distribution to pay the loan will be taxable unless somehow the participant had a way to take a loan from non-Roth funds and can then take out a Roth-only distribution, and qualifies for a tax-free Roth distribution, and pays the loan from those proceeds.