accounting for loans in default

[k man]

the plan accountant would like to know how to account for the accrued interest after there has been a deemed distribution in a post default situation. I read A19 of the Q&A in the proposed 72p Regulations to say that you disregard the accrued interest after a default except for the purpose of calculating availability of future loans. Thus, there is no interest that must be accounted for or assigned to the participants account as a receivable.

Anyone care to comment.

[Bill Berke]

I agree with your comment, but you can now read the final reg's, which, I believe say ignore the interest accrued.

[Guest PeterGulia]

Although IRC 72(p) governs federal income tax reporting of a participant loan in "default", the IRC is not the relevant authority for the plan's financial statements accounting.

The plan administrator must decide (and the independent accountant might examine) whether the outstanding loan remains a plan asset, and what its fair value is.

The AICPA Audit and Accounting Guide, Audits of Employee Benefit Plans, expressly states: "[t]he fact that the participant pays tax on the amount of the loan does not necessarily mean the loan is considered to be canceled .... Depending on the nature of the plan and the plan terms, the loan may remain due and payable, interest may still accrue[,] and the loan may continue to be reported as a plan investment on the [plan's] financial statements .... Delinquent loans are considered to be assets held for investment purposes." AICPA Guide at 7.48 (May 2000 edition).

To the extent that the loan was from IRC 401(k) amounts, the plan cannot consider the loan canceled until the participant's separation-from-service or other distribution event.

According to the AICPA Guide, the independent accountant does not consider whether the plan administrator has correctly valued a participant loan but instead evaluates the plan's procedures for determining fair value and whether the plan administrator followed those procedures. AICPA Guide 7.12h; SAS 57.

Please note that even the May 1, 2000 edition of the AICPA Guide does not reflect the recent Form 5500 regulations.