Do ALL Plan Loan Errors Have to be Corrected Through VCP?

[ERISA-Bubs]

I've heard many times that all plan loan errors have to be corrected through VCP. I just looked at 2013-04, though, and it really only says you have to use VCP if your loan didn't comply with 72(p)(2).

I have more of a defaulted loan situation that I don't plan on treating as a deemed distribution. Can I use SCP???

[Lou S.]

I'm curious on 2 points -

1 how do you have a defaulted loan that complies with 72(p)?

2 how do you have a defaulted loan but not a deemed distribution?

Am I missing something obvious?

[ERISA-Bubs]

1. You're right, a defaulted loan doesn't comply with 72(p), but the way I read EPCRS is you have to use VCP if your loan was designed in a way that doesn't comply with 72(p). In our case the loan was designed to comply with 72(p), but operationally did not.

2. A defaulted loan is a deemed distribution, but I want to correct it (preferably through SCP) so that is is not a deemed distribution. Can't this be done?

[BG5150]

From the EPCRS section dealing with correction of loan defaults:

The correction methods set forth in section 6.07(2)(b) and © and section 6.07(3) are available for plan loans that do not comply with one or more requirements of § 72(p)(2) and are corrected through VCP or Audit CAP.

(emphasis mine) Sec. 6.07

[BW]

I've had some very compelling stories around defaulted loans but every IRS agent I've ever asked says it is a tax issue more than a plan issue. Payment is the responsibility of the participant. If you are more than 2 quarters out you're outside the window for repayment the loan should be deemed a distribution.