Delinquent Loan not defaulted

I met with a new client this week.  It is a trustee-directed pooled plan.  They are moving to a daily platform with us as TPA.   It is a Sept 30 plan year end.  They've used an insurance company as record keeper/administrator for many years who did testing, 5500 and an annual statement.  

The plan sponsor mentioned she wanted a long separated participant out but they had a loan.  I ask are they making payments - answer no.  I said oh the insurance company did a 1099-R then?  She said no they don't do that, she does 1099-Rs.  So there is a long delinquent loan.  

Our engagement letter says we are not responsible for anything prior to our engagement which is Oct 1, 2023.  I want to wash my hands of this.  Once it transfers to the new record keeper the loan will be on the books unless they can convince this person to take distribution before Oct 1 of which I am hopeful.

I'm not that in tune with error corrections.  Our clients are generally small and clean.  I don't want this loan correction process with the IRS to fall on me.  How can you go back years and default a loan with 1099-R?  I will ask how long ago has this been going on.  I know it is not good to say - pay it off fast and forget the whole thing.  Payoff is questionable anyway as it is about $15,000.  I is a very successful company with high earning owners - the responsibility for not defaulting falls on them so they could owe the penalty but I'm surprised this insurance company did not say something - they have the record keeping, issued the loan, do the testing, admin and 5500.

Comments?

Tom

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

I believe the IRS fix would be to default the loan now, issue a 1099-R for the loan amount plus accrued interest. I'm not sure if it can be self corrected or requires VCP. It used to require VCP but it seems like now it may be eligible for self correction though if it's more than 2 years old or to an former HCE VCP may still be required.