Loan from Unrelated Balance

A Dr. left a practice and started his own.  He rolled his pension into a new plan established by his new practice.  This money would be an unrelated rollover, correct?

He promptly took a $40K loan.  Made payments.  COVID comes and he suspended his payments. He forgot to re-start his payments so now the loan is in default.  

If I am correct and the money the loan was taken from was his rollover account, can't we just distribute the remaining balance, issue a 1099-R and be done?  Would it be an offset?

Dr. Loanshark is only 55, if that makes a difference.

It depends on the distribution timing policy.  If your plan allows for withdrawals of rollover money at any time, then you'd have a benefit offset.  If the rollover money isn't distributable until some later time (age/service/etc.) then you have a deemed distribution instead.

Not to mention that if it wasn't distributable the plan would have an operational failure.

EPCRS allows the participant to re-amortize the loan over the balance of the five year period. There is no need to report this as a deemed distribution. [EPCRS §6.07(3)(d)]