Loan from basically a dormant plan

[R. Butler]

Sole proprieter sponsored a retirement plan. She had no employees, so she was the only participant. She has not contributed since 2011, but has not terminated the plan. It is doubtful that her business will continue. She wants to keep the plan open and take a loan against her balance. I don't see that she can do that under the circumstances. Am I missing something?

Thanks in advance for any guidance.

[K2retire]

If it is a profit sharing plan with no contributions in at least 3 of the last 5 years the IRS is likely to consider the plan terminated.

[david rigby]

Can the plan issue a loan to someone unable to repay?

[R. Butler]

Can the plan issue a loan to someone unable to repay?

No, but in this case there is no evidence that the participant wouldn't be able to repay.

My concern is that the IRS would view this as a terminated plan & treat it as a taxable disitribution.

Thank you both for your replies.

[BG5150]

Could she put, like $1,000 bucks into the plan?

[Kevin C]

No contributions in 3 out of the last five years usually indicates a discontinuance of contributions, which results in 100% vesting of all affected participants. There are exceptions. For example, if the lack of contributions is due to a lack of profits, it may not result in a discontinuance. see Rev. Ruling 80-146. The big problem with these rules is that once you determine a discontinuance has occurred, the vesting ends uup being applied retroactively.

Another issue to consider is that the plan must have a sponsor. If her business doesn't continue, who will sponsor the plan?

[Bird]

I don't see a problem with making the loan, as long as the business is in operation at the time. The question is, is she going to discontinue the plan in the near future, and if so, the loan will become taxable, assuming she can't pay it off then - why bother, and not just terminate the plan and be done with it/take whatever money she needs as a lump sum?