Any possible fix to this loan in default?

[Blinky the 3-eyed Fish]

An owner takes out a loan in Oct 2016 with monthly scheduled payments.  He doesn't make a payment by the time we notice in May 2017.  Is there anything that can be done to make it so the loan is not in default?

After all, if he had taken out the loan with quarterly scheduled payments, the first missed payment wouldn't have occurred until Jan, and the loan wouldn't have defaulted until June 30th. 

[ETA Consulting LLC]

Just shooting from the hip, but I think there is VCP correction with a reduced fee for this one.

Good Luck!

[Belgarath]

See Revenue Procedure 2016-51, Section 6.07(3).

[Blinky the 3-eyed Fish]

I am being told by colleagues that to correct under the Rev. Proc. one must submit under VCP, and VCP doesn't allow the correction for owners.  I am in the process of confirming this information for myself, but I wanted to throw that out there now.

[Belgarath]

I wonder if they mean you can't use the "streamlined" 14568-E, in which case I agree. But you can still file under VCP. Don't have any experience to judge whether or not it will be successful.

Section II - Eligibility for Use of Form 14568-D (my edit - this is what the IRS form says, but that's an incorrect reference, cause the form is a Form 14568-E...)
Yes   No
A.
Is any affected participant either a key employee (as defined in Code section 416(i)(1)) or an
owner- employee (as defined in Code section 401(c)(3))?
If “Yes,” proceed to Section II B.
If “No,” skip Section II B and proceed to Section II C.
Yes   No
B.
Is the purpose of this request limited to permitting the plan sponsor to report the loan as a
deemed distribution in the year of correction instead of the year of the failure?
If “Yes,” complete Section III and then proceed directly to Section IV D. (Sections IV A, B, and C
do not apply.)
If “No,” STOP - do NOT use this schedule. Any request for relief should be made by filing a
detailed written attachment to Form 14568, Model VCP Compliance Statement describing the relief
requested
and the reasons why such relief should be granted.
 

 

[Blinky the 3-eyed Fish]

I agree.  I found out that same information.  They can submit, but it seems like they better have a good reason why the owner didn't make payments.  In my case, he just forgot to, so I have serious doubts he will be successful.

[Belgarath]

Yeah, funny how the owner can just "forget" to make payments. No one ever seems to "forget" to pick up their check when they are withdrawing the funds. Perhaps you can claim that the owner's Achilles limbic system was acting up.

[My 2 cents]

18 minutes ago, Belgarath said:

Yeah, funny how the owner can just "forget" to make payments. No one ever seems to "forget" to pick up their check when they are withdrawing the funds. Perhaps you can claim that the owner's Achilles limbic system was acting up.

"I forgot" wouldn't have worked for Steve Martin ("I forgot that armed robbery was against the law!") and it is unlikely to work here.  If the owner, within a month of going through the motions to request and obtain a plan loan, forgot that taking a loan out requires that it be repaid, you have to wonder how well everything else at that company is getting done.

[Kevin C]

Not sure how much it helps, but I did a VCP filing under similar circumstances in 2010 to correct 4 loans where the employer forgot to withhold loan payments from payroll.  3 of those loans were for owners.  We asked that the loans not be taxable and it was approved. They did want proof that the loans had been re-amortized and payments started under the new schedule before they closed the filing.

 

Is it a significant enough amount to consider an anonymous filing?