What happens to an outstanding loan against 401(k) as owner of C corp

[Guest alwilkins]

If I have a loan against my 401(k) as an owner of a C corp and want to elect S corp status, what happens to the loan, which is prohibited as the owner of as S corp?

[Richard Anderson]

The loan immediately becomes a prohibited transaction once the S election is made. The loan should be paid off before the S election in order to prevent a prohibited transaction.

[Dave Baker]

See also

http://benefitslink.com/boards/index.php?showtopic=5185

re excise tax consequences

[Dave Baker]

Originally posted by Richard Anderson

The loan immediately becomes a prohibited transaction once the S election is made.  The loan should be paid off before the S election in order to prevent a prohibited transaction.

Authority for this is Department of Labor Advisory Opinion 84-44A, I think ... does anybody have a copy of that advisory opinion in data format they could paste into a message here?