Loan or distribution?

[Guest maddie7]

Participant withdrew $18,000 from individual account in profit sharing plan in November 2012. The participant started making loan repayments in January 2013 however the participant did not sign the loan documents until February 2013. Can this still be considered a loan or is a taxable distribution? If it's a taxable distribution, what do I do about the repayments that have been made to date?

[ETA Consulting LLC]

The administrator failed to follow the written terms of the plan. This is under either scenario, a loan or a distribution. I would revisit the plan's procedures to determine how a participant accessed funds without administrator involvement (i.e. distribution form or loan form) before I attempt to determine how the amount is to be treated for tax purposes. Once you determine this, then the process should become clearer.

Hope this helps.

Good Luck!

[Kevin C]

My first concern would be correcting whatever allowed a participant to improperly withdraw funds from the plan.

I would then look to EPCRS (Rev. Proc. 2013-12) and if the plan allows loans, the loan provisions/loan program. If the plan allowed loans and provides for the statutory cure period, taxation may not be an issue. I would first look at the possibility of correcting as a loan under SCP (self correction). VCP would be the last resort.

http://www.irs.gov/irb/2013-04_IRB/ar06.html

The IRS has a number of web pages with information on fixing plan mistakes.

[BG5150]

How do you correct a loan under SCP?

[Kevin C]

VCP correction for loans is required if you want to change the tax consequences of a loan failure. If there is no need for that and the operational failure fits in the requirements for SCP, why couldn't you use SCP? Based on the OP, payments began before the end of the statutory cure period, so unless their loan provisions are unusual, being a couple of months late starting payments should not have caused the loan to be deemed. Hopefully, they either got caught up on payments or reamortized with the February paperwork.