Participant dies with loan outstanding

[austin3515]

To whom is the loan offset taxable? Deceased participant's estate or the beneficiary? And why can't I find any sites at all!

http://benefitslink.com/boards/index.php?/topic/51842-deceased-participant-questions/

I found this thread, but there was nothing conclusive... How could this not be well documented??

[four01kman]

My take is to bifurcate the distribution. The unpaid loan is an obligation of the participant; the remainder is to be distributed to the beneficiary(ies).

[austin3515]

I agree - take for example a participant with $500 of investments and a $20,000 loan balance (they took an in-service after they took a loan). Because of this example alone I cannot imagine a different outcome. But nevertheless, I cannot find anything concrete. I will check with Corbel to see if it is buried in their document somewhere.

[My 2 cents]

I don't work with 401(k) plans, but -

Similar to another recent thread dealing with outstanding loans greater than assets still invested. I think the conclusion was that the participant's account balance would be treated as $20,500. $20,000 goes to pay off the remainder of the loan and only the invested $500 is left to go to the beneficiary. The loan balance cannot just be forgiven for tax purposes. The money already paid to the participant when the loan was taken, to the extent not repaid, would be ordinary income (perhaps with excise taxes on top). Isn't that how it would work?

[DMcGovern]

From the EOB, "If the participant has an outstanding loan at the time of death, the participant's death will usually result in an offset of the unpaid balance against the accrued benefit. The participant (or the participant's estate), not the beneficiary, will be liable for any taxes resulting from that offset, because the beneficiary is not a party to the loan agreement. The tax liability might be reported on the participant's final income tax return or on the estate's income tax return."

Above from EOB Chapter 7, Section XIV Part I

It also references Treas. Reg. Section 1.72(p)-1 for taxation of loan offsets.

I also found that 72(t)(2)(A)(ii) provides an exception to the early withdrawal penalty for distributions made to a beneficiary (or to the estate of the employee) on or after the death of the employee.

Hope this helps!

[austin3515]

Bless you, I could NOT find that in the EOB!

[Francis]

We had a participant die with an outstanding loan. The loan was never repaid so it eventually defaulted (in a later tax year) and a 1099 for the default was issued to the participant. The CPA passed the 1099 through to the estate.

Interestingly, the estate was insolvent with no funds to pay the tax generated from the 1099 (the loan proceeds were fully spent by the participant before dying). I'm unsure if the IRS will ever be able to collect the tax given that the estate has no funds.

[austin3515]

Unless Moses works for the IRS I'd say they can't get water out of a stone....

[BG5150]

"cite"! They are cites. Not sites.

[austin3515]

FWIW I often wonder which spelling applies. :D

[Bill Presson]

But we are often looking for sites with cites.

[austin3515]

Is anyone else's mouse scroll wheel not working on the site? It seems to be just this website not working for me?

[Mike Preston]

Mine works fine on this site.

[austin3515]

strange... Thanks though!

[BG5150]

Mine works just fine on this cite, too.

[ESOP Guy]

Are cite and site sight words?

[scgcpa]

The answer is really simple. ALL plan administrators need to build in language that the beneficiaries become liable for the balance and repayment continues on the same terms and conditions until the loan in repaid, and the remaining account balance is restricted for withdrawal  below the outstanding loan balance until the loan is satisfied. The is NOTHING in IRS regulations that prevent this approach.

[Lou S.]

Strange bump. But you are OK with giving the beneficiary a tax liability for loan balance?  It seems to me on death you issue a 1099-R to the participant for the outstanding loan with a code 4M.

[M.S. Hatlee QPA, QPFC]

What does the Loan Policy and the Promissory Note say, if anything, about this situation (e.g. can a beneficiary continue to make payments on a deceased ppts loan? May want to check these documents.

[Bird]

19 hours ago, Lou S. said:

Strange bump.

It really is.  What prompts someone to make their very first post on a 4+ year old topic, and forcefully say something that isn't accurate?!