401k loan - deemed distribution

[52626]

Facts:

Participant took a loan on 6/23/2014

Participant terminated on 5/26/2015

No loan payments were made for 2014 and 2015. On 1/3/2015 the recordkeeping deemed the loan in default and issued a 1099R for 2015.

Participant is rehired 3/28/2016.

Does the fact the participant terminated prevent the employer from filing under VCP? Employee is willing to make all missed loan payments and income related to the late payments.

The outstanding loan balance is over $37,000!!

If this can be filed under VCP and the Plan Sponsor get approval, does the participant file an amended 1040 for 2015 removing the taxable loan distribution??

Or is the participant SOL!!!

Any thoughts........

[Lou S.]

The plan did nothing wrong. The participant has taxable income for 2015. Heck since no payments were even made in 2014 the loan was probably in default back then and a 2014 1099-R should have been issued.

[Griswold]

I agree with Lou in that I don't know what you're trying to correct (though there are plenty of plans that dictate the timing of the default in this way.)

But I think it's too late for the participant to undo it all. If there were a bona fide error, the ER could correct the 1099-R and reissue it, but that doesn't seem to be the case here.

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Edited to fix typo

[hr for me]

Is there anything in the loan procedure paperwork or signed loan documents that addresses non-payment and/or balance at termination? It sounds like the recordkeeper defaulted it as they should. I don't see how you can correct back almost 2 years of no payments/default now...

Just an opinion -- these types of situations always have me shaking my head....I always wonder why the participant didn't notice the absence of the loan payment deductions from his paychecks and say something at the time? I guess they are just hoping it will go away, be the employer's fault and somehow miraculously there will be no bad consequences for them and it will be a $30K bonus?

And who on the employer/payroll side misses a years worth of loan payments? I would be doing a large scale audit of all loans to figure out where and how this was missed.