Participant Loan status with Severance Pay and Partial Distributions

[RPP2001]

A participant has terminated employment in August 2013, however, is still receiving severance pay through the end of 2013. The participant has an outstanding loan and loan repayments are being deducted from the severance pay. Plan allows for partial withdrawals and wants to just take a portion of their account as a cash withdrawal (not rollover), but, does not want loan to be offset and taxed at the time the partial withdrawal is taken. Loan is in good standing. Loan policy states the following: "An outstanding loan balance must be fully and immediately repaid upon death or termination of employment. However, if a Participant continues to receive severance pay from which loan repayments are made as payroll withholding, then solely for puposes of this Section (...which is the loan section...), a Participant will not be deemed to have a termination of employment until the first day after his last payment of such severance pay."

As a note, the plan specifies that if the loan is not repaid by the end of the quarter following the quarter in which the participant terminates, the outstanding balance will be treated as a taxable distribution fromt eh plan.

Can the participant take this partial withdrawal without having the loan offset and taxed at the same time? The participant wants the loan to be taxed in 2014 after the severance pay stops and the payroll deduction of the loan repayments also stops.

Can the participant "choose" which investments they want to take in the partial distribution (i.e. leave the loan asset and withdraw only from the mutual fund investments)?

Thank you for any input you may have.

[QDROphile]

This is all a matter of plan interpretation. The law does not compel any particular terms, arrangements, or actions after termination of employment except with respect to failure to pay timely and maybe no distribution of all the balance other than the loan -- maybe.

[RPP2001]

What exactly do you mean about "maybe no distribution of all the balance other than the loan?"

So, is this sort of a grey area? Does the participant have any recourse if they were never made aware of this "practice" via the SPD or any other employee communication?

What do you suppose the purpose is for the Loan Policy quote above?

Further, the participant is not being permitted to choose which mutual fund investments are sold to satisfy the partial withdrawal request. The recordkeeper has the system programmed to only process as prorata across all of the mutual fund investments, which is not what the participant wants. Since this is a participant-directed plan, is the recordkeeper over stepping?

Thank you.

[QDROphile]

The plan does not have to give a participant the ability to to determine which investment funds will be liquidated to fund a distribution.