Proposed Regulations Issued: Loans Made While a Deemed Distribution Lo

[Dave Baker]

The following article is from Sal Tripodi's TRI Pension Services web site ( http://cybERISA.com ) and is reprinted here with Sal's permission. Copyright 2000 TRI Pension Services, all rights reserved. Post a reply to this thread if you would like to discuss comments or questions about this article with other users of BenefitsBoards.net!

Loans Made While a Deemed Distribution Loan Remains Unpaid

[Effective date.] Prop. Treas. Reg. §1.72(p)-1 [click], Q&A-9(B) and ©, Q&A-19, Q&A-20, Q&A-22(d), 65 F.R. 46677 (July 31, 2000), supplement final regulations issued today under IRC §72(p) ... The proposed regulations will apply to loans made on or after the first January 1 which is at least six months after the regulations are finalized. Since January 1, 2001, is already less than six months away, the earliest effective date for the rules contained in these proposed regulations will be January 1, 2002 (assuming final regulations are issued by June 30, 2001). For earlier loans, a reasonable, good faith compliance standard applies. Presumably, following these proposed regulations will satisfy this good faith standard.

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A loan that is deemed distributed under §72(p) is considered outstanding for purposes of applying the loan limits under §72(p)(2)(A) until the loan is repaid (either through payments made by the participant or by a loan offset). See . Proposed Q&A-19(B)(2) [click] will establish additional requirements on a subsequent loan that is made before the deemed distributed loan is repaid. If these conditions are not satisfied, the subsequent loan is treated in its entirety as a deemed distribution under §72(p). To satisfy Proposed Q&A-19(B)(2), one of the following conditions must be met:

1. repayments on the subsequent are mande under a payroll withholding arrangement that is enforceable under applicable law, or

2. the plan receives adequate security from the participant that is in addition to the participant's accrued benefit under the plan (i.e., the plan obtains other collateral for the loan).

The payroll withholding arrangement described in 1) may be revocable but, if the participant later revokes the arrangement, the outstanding balance of the loan is deemed distributed. Similarly, if the additional collateral is no longer in force before the subsequent loan is repaid, the outstanding balance of the loan becomes a deemed distribution.