Loan Failure

[Spodie]

It was recently discovered on a plan that we recently took over administration (not our error, so please don't judge), the Owner/Participant took out a loan in 2009 and has never made a payment. In addition, the loan was never reported as a "deemed distribution".

Now that the maximum repayment period (5 years) has expired, per EPCRS, Section 6.07, the sponsor is not eligible for correction methods under Section 6.07 (3) Defaulted Loans and therefore the loan is to be considered a deemed distribution in the year of the failure and the employer is responsible for the withholding.

What if the employer and the participant are one in the same? Does the employer still pay the withholding (the company assets vs the participant)?

Would it be an option for apply under VCP and ask for relief anyway?

In addition since the issue is to an owner/participant there is of course a prohibited transaction too. Can one apply for relief under the DOL's VFCP for the excise tax under 7975(a) if one cannot apply for relief under VCP?

Any experience or advice on this issue would be greatly appreciated.

Thank you!