Deemed distribution of participant loan that did not include accrued interest

[Walter7020]

There was a change in the plan trustee/administrator, The new trustee distributed loans that were not current with payments but did not include any of the accrued interest from the prior trustee in the 1099R (nor any interest through the date of distribution). I thought the appropriate correction would be to restore the loan balances equal to the accrued interest on date of transfer to the new trustee and distribute this balance (with accrued interest) to the participant.

The new trustee says they "cannot go back and establish loan balances for these participants" and "they would have no way to track these loan balances in the future". 

I think this is a plan failure and if you are not going to restore/distribute the balances that the employer would have to remit the accrued interest to the plan. I cannot find anything on point for this. Any guidance for this issue would be greatly appreciated. 

 

[Bird]

The IRS says to include accrued interest.  How much are we talking about...not sure I would be all that concerned.  Recordkeepers are usually pretty good at getting all of the necessary info to set up their own amortization schedules but something about this sounds squirrelly. 

Were they deemed and distributed?  Was there a distributable event?

[Walter7020]

They were deemed and distributed on a 1099R without any of the accrued interest. For one of the loans, the participant never made a payment on the loan and therefore no interest was ever paid and now never accrued.  The loans are not significant but it has resulted in negative loan interest on the Form 5500 for the removal of the accrued interest recorded by the prior trustee. 

 

 

[Lou S.]

why not just file a corrected 1099-R with the correct accrued interest and move on? Assuming we are talking about a 2021 deeming of the loan.

[Walter7020]

The new plan trustee/administrator is not willing to file a corrected 1099r. They have reversed all accrued interest on all loans at the date of transfer to them and do not think any further action is needed. 

I am the plan auditor

 

[Bird]

On 1/21/2022 at 1:28 PM, Walter7020 said:

They were deemed and distributed on a 1099R

Still mildly curious if they were "distributed" (as in removed from plan assets) or being carried as defaulted loans, although it's not relevant to the discussion.  (If they were distributed with no distributable event I think that is a bigger problem than a few dollars of interest.)

If at all possible I try not to argue with auditors or recordkeepers and this is basically an argument between those parties so I am doubly incented to bow out.

 

[BeachBum]

I am an auditor as well. 

The following link discusses defaulted loans which states "Whether due to a participant or an administrator error, a loan that goes into default is a deemed distribution of the entire unpaid loan balance plus accrued interest results."  I think that makes it pretty clear that the 1099Rs that they issues are not correct as they did not include the accrued interest and would need to be corrected.  

https://www.irs.gov/retirement-plans/fixing-common-plan-mistakes-plan-loan-failures-and-deemed-distributions

If there was not a distributable event, they should continue to track these loans and continue to accrue interest on them until such time that either the loan is repaid (not likely) or there is a distributable event.  In the meantime, it causes a book to tax difference that should have a reconciliation in the footnotes to the financial statements.  As such, you may have a bigger issue than just the fact that they did not include the interest in the 1099Rs.