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Loan Repayment Beyond 5 Year after Deemed Distribution


ERISA11

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This may be a dumb question, but I can't find a definitive answer on this in primary sources.  If a loan has been treated as a deemed distribution (because of missed payments) and the 1099-R issued, can the participant make repayments on the loan beyond the 5-year maximum repayment period?  It seems to me that this would be fine because the consequence of violating the maximum repayment period requirement is a deemed distribution, which has already occurred.  So, after the deemed distribution, repayments beyond the 5-year period have no consequence.  Does that seem right?  The only example given in the regulations involves repayments within the 5-year period, so it doesn't really address this question.  Any thoughts are appreciated.

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I have been told that any repayments made after the deemed distribution are acceptable without a time limit & that those repayments go to the Participant's tax basis since they (presumably) already received a 1099-R for it.  It's a sticky subject & I wish there was some better guidance out there.

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I don't think it would even make sense to talk about having a 'basis' by paying back a defaulted loan.

since a loan (even if it is defaulted) continues to accrue interest, it  effects the ability to take new loans, so there is a valid to repay a defaulted loan

The ERISA Outline Book has the following comment

Chapter 7, section IX D 4.Obligation to repay not waived because of deemed distribution. Since the deemed distribution treatment under §72(p) is solely a tax rule, and is not treated as an actual distribution for other purposes (see 3. above), the deemed distribution does not affect the participant's continued obligation to repay the loan. The loan obligation is not extinguished until the loan is repaid, either by the participant through a resumption of loan payments, or by offset against the participant's accrued benefit, pursuant to the plan's security interest. In fact, there is still a fiduciary requirement to enforce the loan, since ERISA requires the governing documents of the plan be followed (e.g., the written loan provisions or loan policy that is part of the plan), and to protect the benefits of the plan participant. See the discussion in Part E. of this section regarding the repayment of a loan through an offset against the participant's account balance or accrued benefit.

 

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Thank you both for your responses on this.  I really appreciate it. 

Tom, it is my understanding from your post, that you agree that there is no time limit on when the repayments can be made after a deemed distribution, correct?

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