Loa repayments not completed in 5 years

[Jakyasar]

Owner only plan.

Loan was not paid off in 5 years (5 years ended 12/31/2025) and 3 left.

Is there any self correction?

Otherwise, what needs to be done?

Never dealt with this before.

Thanks

[fmsinc]

It's not really a loan like you would make from a bank.  The Participant has borrowed his own money, pays himself back, pays interest to himself.  Just because the source is the entire plan account doesn't change that reality.

Make a taxable distribution to the Participant  and the "loan" will be paid off in full

.  

[Jakyasar]

Will the taxation be for 2025 or 2026? I agree with being a distributable event.

[David D]

If an installment payment is missed and not paid by the end of the calendar quarter following the quarter of the missed payment (the cure period), the entire remaining loan balance plus accrued interest is deemed distributed.

Even though the amount is taxed as a distribution, the loan stays active. You must keep paying it back, and those ongoing repayments create "after-tax basis" so you aren't taxed twice on those amounts when actual future distributions occur.

[ConnieStorer]

Hi Jakyasar,

Keep in mind that the CARES Act allowed additional time for repayment.  You may want to look at the original loan paperwork. 

[Artie M]

Dont believe SECURE 2.0 permits the plan to disregard the expiration of the five-year statutory repayment period.   Under your facts, the loan should ber a deemed distribution after the applicable cure period as stated above.  And finally the participant may still repay the debt, but repayment does not erase the deemed distribution.