Loan VCP After Deemed Distribution

[Gruegen]

A participant loan fails to meet the repayment requirements of IRC 72(p)(2) and is deemed distributed to the participant in April, 2014. A year later, the plan sponsor now wants to:

1) Un-do the deemed distribution, which I would presume includes amending / cancelling the previously issued 2014 Form 1099-R.

2) File a VCP Application to ask that the outstanding balance of the loan (including accrued interest) be reamortized over a remaining period that does not

extend beyond five years from the date of the original loan.

Is this possible?

[Belgarath]

Remember that "The Service reserves the right to limit the use of the correction methods...to situations that it considers appropriate; for example, where the loan failure is caused by employer action."

Unusual for an employer to take this step, or give a damn about the employee, unless it was the fault of the employer. Was it? I'm not saying the correction can be used ONLY due to employer action, but the IRS may reject it depending upon facts and circumstances.

Was this person, by chance, the owner/a Key Employee, or a self-employed? If so, you can't use the new 14568-E, Schedule 5 under Rev. Proc. 2015-27.

[Gruegen]

The employer feels that the failure to withhold loan payments was their fault, and that is why the employer is looking to do the VCP. And no, the participant is not an owner/key employee.

However, I am just trying to find out if the employer is even eligible to submit the VCP under this fact pattern (after the loan has been deemed distributed).

Further, the financial institution may not be that willing to cancel the previously issued Form 1099-R.

[Belgarath]

Yes. See Section 6 .07(3) of Rev. Proc. 2013-12, and update in Rev. Proc. 2015-27 as applicable.