Deemed Loan & In-Service Distribution

[401(k)athryn]

Client took a loan, which subsequently was deemed.  Five years later, he paid it back so he could take another loan.  The client is 59 ½ and tried to take an in-service distribution of the remaining account value.  He was denied the full distribution amount due to the deemed amount that was paid back not being eligible for in-service withdrawal.  Has anyone heard of this before?

 

[ETA Consulting LLC]

Nope. 

Good Luck!

[Bri]

Sounds like vendor/platform issues, perhaps?  I usually tell them what they've got coded wrong in their systems, when explaining if they're doing it wrong.

[Pam Shoup]

I have not heard of it.  However, does the plan document have any language that says that in-service distributions can't be taken from after tax money?  That may be what the vendor is looking at.

[ETA Consulting LLC]

1 hour ago, PamB said:

 However, does the plan document have any language that says that in-service distributions can't be taken from after tax money?  That may be what the vendor is looking at.

That wouldn't make any sense.  The repayment of a deemed loan doesn't change any of the withdrawal rights.  It merely creates an after-tax basis in the account that funded the loan.  Hence, if a person takes a loan from the deferral account and it is deemed, that person has a right to repay the loan.  Doing so would actually create an after-tax basis in the deferral account.  

If the account wasn't subject to a withdrawal restriction (e.g. 59-1/2), then the loan wouldn't have been deemed distributed in the first place; it would've become an actual distribution after non-payment. 

Good Luck!
 

[401(k)athryn]

Thanks everyone.  I forgot to mention that this is a 403(b) account. 

It is not a plan that I administer, but I expect that it might be a "policy loan".  Do you think this makes a difference with regard to withdrawal restrictions?

I realize that I may only be able to help an advisor figure this out of I have a copy of the loan policy.

[401(k)athryn]

Pam - I will check on the possibility of the vendor restricting this money from being available for an in-service withdrawal because it is an after-tax source.  That could be it!