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Controlled Groups and Loan Defaults
(Posted December 11, 2002)
Question 241: In light of your last Q&A, suppose a plan sponsored by one controlled group member makes a loan to a participant. The participant defaults and a deemed distribution takes place. Under the new regulations, can another controlled group member make a loan to the participant secured only by the participant's vested interest?
Answer: No. Under the newly finalized regulations, if there has been a deemed distribution and the defaulted loan has not been fully repaid (perhaps by offset), then all future participant loans are automatically treated as distributions unless:
- Payments are to be made by payroll withholding; or
- The participant gives adequate security for the loan other than the participant's accrued benefit.
Under IRC 72(p)(2)(D), all plans of corporations in a controlled group, trades or businesses under common control, or members of an affiliated service group are treated as a single plan. So if there is a default under a plan of any group member, then the new regulation would apply to all plans of all group members. (See Who's the Employer, 3rd edition, Q 10:22.)
I will be discussing participant loans in light of the newly finalized IRS regulations (which open the door for credit card loans), in two webcasts sponsored by SunGard Corbel on Wednesday, December 18. Click here for more information.
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