What to do when plan sponsor has not treated as taxable distributions

[EGB]

What is the "fix" when a plan sponsor fails to report as a taxable distribution a plan loan that was in default in a prior plan year? For example, assume that in 1998 a participant failed to pay a plan loan for an entire calendar quarter and the sponsor should have reported the outstanding balance of the loan as a taxable distribution to the participant (ie, should have defaulted the loan)in 1998 via a 1099R. However, it is now 2000,no further payments have been made on the loan and the sponsor still has not defaulted the loan. Obviuosly, the sponsor needs to default the loan. Can this be done in the current plan year (2000) or must a 1099R for 1998 be done, causing the participant to amend his 1040 for 1998? Are there any consequences to the plan sponsor for failing to default the loan? Is this somehow a prohibited transaction? Any thoughts on these issues would be appreciated.

[Guest MAWalsh]

Beth--

Did you ever receive a reply to this post? I've got the exact same situation and I'd appreciate any guidance you could offer.

Thanks.

m.a.

[Guest 91smithie]

Same Question -- did anybody ever get an answer for this one?

[rocknrolls2]

We have had a similar situation. According to Rev. Proc. 2001-17, the general principles for correction generally require the appropriate reporting and withholding to be done. There are two exceptions to this general rule: (1) if the plan year is a closed year, it can be argued that no reporting would be required. (2) If there are excess contributions of any type and they are districuted pursuant to the correction program, then reporting and withholding is done as of the year of distribution. Since loans should generally be reported in the year of default, the correct answer should be that they should be reported then. This may mean that participants have to file amended returns and report the default. If the person is active and a couple payments were missed but then the repayments were resumed, an argument could be made that the repayments related back to the oldest payment due, thus avoiding potential default.