Final Regulations Issued: Repayment of Previously-Taxed Participant 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!

Final Regulations Issued: Repayment of Previously-Taxed Participant Loan

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Repayment of previously-taxed loan. If the loan is repaid after the deemed distribution has occurred, the repayments (including repayments of interest) are treated as tax basis. See http://www.benefitslink.com/taxregs/72p-final.shtml#QA21 . To the extent a previously-taxed loan is repaid, that portion is no longer a receivable, but reflects part of the non-loan assets included in the participant's account balance (or accrued benefit, in the case of a defined benefit plan). That portion is part of the reportable gross distribution, so the tax basis generated from those repayments is taken into account to determine the taxable portion of that gross distribution. Note that loan repayments are not treated as employee contributions for purposes of the nondiscrimination test under §401(m) nor for purposes of the §415 limits, even though tax basis is generated by such loan repayments. See the last sentence of Q&A-21(a).

<UL>Example. Suppose in the earlier example; click that Bill recommenced loan payments in 2002. By the time the plan makes the lump sum distribution to Bill, the loan receivable balance is only $10,400. The total loan payments made by Bill after the deemed distribution totaled $5,920, which included additional interest. Now Bill's account consists of $10,400 loan receivable and $69,115 cash. The cash consists of the $61,300 assumed in the prior example, plus the loan repayments of $5,920, plus an additional $1,895 of investment earnings that were generated because of the loan repayments made by Bill. The plan reports a gross distribution of $69,115, but the taxable portion of that distribution is only $63,195. Bill has tax basis of $5,920, which represents his total loan repayments following the deemed distribution of the loan.</UL>

[FundeK]

Okay, I understand the loan repayments on a deemed loan generate basis and are not considered employee contributions for purposes of the nondiscrimination test under §401(m) nor for purposes of the §415 limits.

My question is, how are these repayments treated for future distributions? For all of the recordkeepers out there.....(or anyone else who can answer this!), how are the loan repayments put back into the participant's account?

For example, you have a deemed loan repayment of $3,000. The original loan was taken out as $2,000 deferrals, and $1,000 match. When you process the deemed loan repayment, do you have to deposit back into the account as deferral and match, or can you redeposit it as after-tax?

If you have to deposit it as deferral and match, you now have basis in "pre-tax" sources? If you redeposit it as after-tax, are they now subject to after-tax withdrawal requirements?

Any cites would be greatly appreciated!!