loan default

[thepensionmaven]

Participant terminated employment with a defaulted loan.

It is my understanding that if he does not request a distribution the amount of the outstanding loan is a "deemed distribution" and he includes the amount as income and is subject to 20% withholding and any 1099R would include the full amount of the outstanding loan.

At the time he requests a payout, the outstanding balance would be treated as an offset distribution and would be netted out of any actual distribution.

I just got off the phone with one of the fund companies that mentioned that they would give the participant a 1099 for the withholding only.

This just does not make sense.

[QDROphile]

Whether or not a distribution is requested, a competent plan document would provide for an offset distribution after any cure period has expired. The balance of the loan at the time of the offset should be reported as a distribution on Form 1099. Other amounts will reported if other distributions occur in the same year.

[jpod]

I am pretty sure there isn't any tax w/h on a deemed distribution.

[My 2 cents]

I am pretty sure there isn't any tax w/h on a deemed distribution.

How could there be? Just wondering.

[ETA Consulting LLC]

There are a few exemptions from withholding on 'cashless' distributions. Since the loan offset would be treated as a taxable distribution, and no cash is distributed, then there would be no withholding. You would get the same result if the participant immediately rolled the entire account over to an IRA; leaving the loan offset as the only taxable amount.

Also, your series of events is a bit off: The loan offset occurs immediately upon a distributable event when the loan is defaulted; it has no bearing on an actual distribution request being completed. QDROphile pointed this out.

Good Luck!

[thepensionmaven]

Whether or not a distribution is requested, a competent plan document would provide for an offset distribution after any cure period has expired. The balance of the loan at the time of the offset should be reported as a distribution on Form 1099. Other amounts will reported if other distributions occur in the same year.

This was my thinking, as well. The other perplexity is the fundholder does not offset the loan from the total account balance when giving a 1099R; their reasoning is that if the loan is already out of the plan, there is nothing to offset. As this is a pretty large fundholder. I'm shocked.

[K2retire]

The other perplexity is the fundholder does not offset the loan from the total account balance when giving a 1099R; their reasoning is that if the loan is already out of the plan, there is nothing to offset. As this is a pretty large fundholder. I'm shocked.

Are you suggesting that the amount should be deducted from the participant's account a second time?