Loan exceeds the 50,000 Limit Lookback Rule

[cpc0506]

Key employee wanted to take new loan ($50,000) in November 2014. He had a previously loan ($50,000) which he paid off in April 2014. When asked of the TPA the maximum loan amount, the prior 12 month loan balance was taken into consideration and the eligible loan amount was determined to be $10,000. When the year end work was done, it was determined that the plan sponsor approved a loan for $50,000.

What options does the participant/client now have other than defaulitng the loan, resulting in a deemed distribution? Under VCP, we can ask to default the loan in 2015, but the money is still due back to the plan. Is that correct?

[ETA Consulting LLC]

Well, you wouldn't default "the loan", but instead treat the excess amount as a taxable distribution. That would, then, become your correction.

Good Luck!

[cpc0506]

So are you saying that you don't reflect the distribution on the Form 5500-SF on the line 7e - Certain deemed and/or corrective distributions?

Since the employee has not met any distributable event, the funds are due back to the plan and I consider this a 'deemed' distribution.

[ETA Consulting LLC]

Sorry, I didn't see the followup. I'm not speaking to the Form 5500, but nothing would be deemed when an actual distribution has taken place.

However, in framing the correction, you're right that an 'actual' (not deemed) distribution was given from the plan when there was no distributable event. That is what you are correcting in light of the failure to limit the loan amount. So, if I were submitting the loan correction under VCP, you will see where the Model Form explains the correction. [[Have the participant repay the excess to the plan and continue to making payments of the remainder under the correct loan terms]]. You may also be able to take advantage of a reduced user fee for the filing.

Good Luck!