Plan Loans: How to figure deemed distribution and remaining loan balance?

[GrammieMame]

At the end of 2012, a plan participant with a $50,000 loan had outstanding principal of $34,702 and all loan payments had been made as required. In 2013, no loan payments were made. At the time of the default (June 2013) her outstanding principal was $29,927. This amount, plus interest, resulted in a deemed distribution of $31,228 which was reported as taxable income on her 2013 1099-R. Assuming I did the interest calculation correctly, was the deemed distribution based on her June 2013 outstanding principal the correct amount?

She does not plan on making further loan payments. I understand that the loan should still be part of the plan assets. What amount should be used? Should it be the $34,701 at the end of 2012 (paid up amount), or the $29,112.87 that remained as the principal outstanding after the deemed distribution date of June 2013?

Any help would be appreciated.

[Bird]

How did you get from a balance of 34,702 at 12/31/12 to 29,927 in June if no payments were made?

[My 2 cents]

Note that I have no involvement with plan loans.

The deemed distribution is not limited in any way by the amount of money remaining in the account, is it? As of the date of default, the outstanding balance of the loan became a deemed distribution subject to taxation although during that year, there might have been no actual movement in either direction of any assets. At least that is how I understanding these things to work. Is it not so?

If the rest of the loan becomes a deemed distribution, how could it be considered to be part of the participant's account? It is considered to have been paid to the participant.

Echoing Bird, if the outstanding balance at the end of 2012 was $34K and nothing was paid towards the loan after that date, wouldn't the outstanding balance be more like $35K when the loan defaulted?

What is meant by the term "paid-up" in connection with a loan? I am familiar with the idea of there being a paid-up amount under a whole life policy but not in the context of a loan. Any scheduled remaining balances of the loan become irrelevant once scheduled payments are not made.

[GrammieMame]

So should the deemed distribution should have been the outstanding principal remaining after the last timely payment in 2012? I thought the deemed distribution date was the end of the cure period provided in the loan program, which would have been June 2013

[My 2 cents]

But wouldn't the outstanding balance as of the end of 2012 have grown with interest between then and June 2013, in the absence of any further loan payments?

[Bird]

It looks like we default as of the end of the cure period, which would mean adding some accrued interest. Again, we're not understanding why the balance went down instead of up if no payments were made.

[GrammieMame]

Still trying to figure it out. For now, let's not consider the fact that the balance went down.

At the end of 2012, she had made all her payments on time and her outstanding principal was actually $33,919.34. So is that the amount that's in default? Is that the amount, plus interest, that should have been reported on the 1099 as her deemed distribution?

[My 2 cents]

Not an expert, but my vote is for the outstanding balance with interest to the date of default, taking into account only actual payments made towards the repayment of the loan. That would presumably be $33,919.34 plus a half year's interest, based on earlier comments, not what it would have been had timely payments continued to be made.

[Bird]

As noted, we add interest. I'm not sure there's firm guidance on it, but it seems logical to me that it should effectively be the current value of the loan.