Loan to a non participant

[pixmax]

I just took over a plan and noticed that there is a note to a non participant who has not made any payments. When does it go in default and who would receive the 1099 on the defaulted loan?

[ESOP Guy]

If the person was never a participant then don't think of it in terms of the loan rules but in terms of an investment gone bad.

There can be a host of side issues.

1) Is the non-participant a disqualified person in relationship to the PT rules?

2) Did the various fiduciaries do their duty when granting the loan and trying to collect the loan?

3) What efforts have been made to collect the loan?

4) Was the loan secured by anything? If so, should the plan try and foreclose on that asset?

Those are just the questions that come to mind quickly. There might be others and I am sure other will speak up if they come to their mind as they read this thread.

If this is a balance forward plan most likely everyone will take a hit to their balance when the asset is written down. If it is individually directed then the person whose account it is in will take the hit when the asset is written down.

But once again think in terms of this being an investment if the person the money was loaned to was never a participant not the loan rules. Those rules only apply to loans made to participants.

[Bird]

If it's not a participant loan it is an investment. It could be a balloon note, with a single payment at the end. It could be in arrears. Lots of possibilities, but defaulting it as you would a participant loan is not the issue. There might be issues regarding valuation, and fidelity bond coverage, etc. Generally a PITA and not a practical investment.

[ESOP Guy]

Bird brings up a good point. If the bonding and Summary Annual Report (and maybe other things also- I don't work on many small plans) then the exemption for the need to get a plan audit can be blown with this kind of asset in the plan. So one might want to see if they have failed to get the needed audits.

I know this traps many small plans. In my firm the people who manage the smaller plans are constantly on the look out to make sure an audit isn't needed. Too many people are in the mode of thinking less then 100 people no audit. That just isn't what the rules say any more. I know from DOLs of our clients the DOL looks to see if small plans need an audit.