Employer Failure to repay loan correction method

Hello.  A plan sponsor erroneously put in a stop date in payroll system for a participants loan. Last loan payment September 2017. This loan is past the cure period of December 31st.

The loan is set to be re-amortized over the terms of the loan. But do they have to file through VCP or can they just self correct since it is within two years?

Hello.  There is really not a lot of good options to self correct under EPCRS for loans.  I think that has been a long standing issue raised by ASPPA and others.  Technically, if the loan is past the cure period of a current employee, then it is a deemed distribution requiring reporting on a Form 1099-R.  The loan is then outstanding and continuing to accrue interest.  Obviously, this is a terrible result because the plan sponsor erroneously put in a stop date, so it was their error.  This could be addressed by filing a VCP or taking their chances by not deeming and just re-amortizing the loan over the remaining term. 

According to Rev. Proc. 2016-51, unless the loan is corrected under VCP or Audit CAP, it is taxable when deemed and must be reported on 1099-R. It starts in 6.07(1) and continues into (2).  Unfortunately, with the new VCP fee schedule, it is much more expensive to correct loans under VCP.  Hopefully, the IRS will respond to the feedback they are getting and make it easier to correct loans again.

just for the record, or at least as best as I can logically figure it out

other errors, e.g. correct failed ADP test or missed deferrals, etc. do not involve taxes (at least not directly) so you are permitted to self correct.

a loan failure involves taxes that are due since the loan is in default. that is why the requirement is through VCP rather than merely self correcting.

Tom - I threw logic out the window a long time ago on this stuff.  I like that an expert such as yourself is still using logic to figure this stuff out.  I guess I need to add this skill back into my toolbox.  

now now, just because the I in IRS stands for illogic (at least at times in regards to pensions)doesn't mean you can't use it....

Thanks all.