Loan from Roth Deferral and Subsequent Loan Offset (Distribution)

[MarZDoates]

We have a plan that has Roth deferrals and participant loan options.   2014 was the first year of Roth Contributions for Participant.  In 2016,  Participant took a $1500 loan from the Roth source, (before meeting “qualified” status).     The record keeper allocated the loan payout between the Roth basis and earnings pro-rata (reducing Roth basis).  example:  $1100 Roth basis; $400 earnings.

The participant terminated nine months later, in 2017.  The loan balance was paid down to $450.   The record keeper did not increase Roth basis for any portion of the repayments, so the distribution will tax the original loan amount including all principal that had been paid off.  

By taking the loan, the participant will be taxed on the entire amount of the loan, including the amount attributable to Roth, regardless of loan repayments.

Is it correct that there is Roth basis adjustment (decrease) for the loan withdrawal but no  Roth adjustment (increase) for any portion of the loan repayments?
 

[ETA Consulting LLC]

It has to be consistent with principles of math.  When the loan was offset, part of that offset represented a return on the Roth basis and the other part represents earnings (which were not part of a qualified distribution).  The only way the Roth Contribution basis would be increased is through a Roth Deferral (or conversion or whatever).  Loans really don't change any basis. 

Good Luck!

[MoJo]

I agree with ETA - which is why in our shop, Roth is "lienable" but not "loanable."  There is a task force in place to identify ways in which we can actually accommodate loans from the Roth source, but this (and every other shop I've worked for) doesn't treat loan repayments the same as a bank, and "tracking" the basis portion of each loan repayment has proven troublesome.