Loans in excess of limit

The plan administrator inadvertently allows a participant to exceed the plan dollar amount limits when taking out a second loan (second loans are permitted). 

The plan permits in-service distributions.

At the time the loan is taken out, the participant is already 59 and 1/2.

The error is found several months later. 

Because the participant was already 59 and 1/2, I believe that the excess amount over the dollar limit should count as a distribution (as opposed to a deemed distribution) and the payments (principal and interest) that have already been made should be applied to the correct loan amount (i.e., the amount that is left once the excess has been characterized as a distribution).  In addition, the employer must issue a 1099-R.

No VCP is necessary.

Am I missing anything here?

Thank you

I agree with you 1000%.  The amount that exceeds the loan limit is treated as an actual distribution. 
It's going to be interesting how the actual payment is solved (since it was calculated on a higher amount).  It seems as if a consistent approach would be to keep them the same and simply pay the loan off early.  Then again, that's just one option.
Another thought is that since he received an actual distribution, this amount was eligible for rollover within 60 days of receipt.  Since it is months later, there seems to be no way to avoid that taxable event. 
There "MAY" be a VCP filing in order to get the money back in the plan in order to avoid the table event, but I agree with your premise.

Good Luck!

I agree with you both that that should satisfy the IRC requirements, but if the participant reasonably relied on the plan administrator to determine the amount he/she could receive as a loan, and now objects to having the excess treated as a taxable distribution, the employer might have an obligation under ERISA (at least in theory) to go the VCP route, with self-correction potentially being available. Also, this might qualify for the discretionary extension of 60-day rollover period if the employer or employee applied for such to IRS.

19 hours ago, Luke Bailey said:

I agree with you both that that should satisfy the IRC requirements, but if the participant reasonably relied on the plan administrator to determine the amount he/she could receive as a loan, and now objects to having the excess treated as a taxable distribution, the employer might have an obligation under ERISA (at least in theory) to go the VCP route, with self-correction potentially being available. Also, this might qualify for the discretionary extension of 60-day rollover period if the employer or employee applied for such to IRS.

You're right.  It would be an easy objection by the participant on the basis that a taxable distribution was received without them being notified of their right to roll it over.  So, the onus would seem to remain on the Plan Administrator (notice the capital letters ) to make all things as they should've been had the loan limit not been exceeded.  But, you're right; it can become quite the moving target. 

Good Luck!