Defaulted loans

Pretty sure this has been addressed before, but I can't find the discussions.  Active participant last made a loan payment in 2020, thinking it was paid off.  Investment house is showing she still owes $200 plus.  Investment house shows her loan as Deemed.  Can she still pay it off, and if so should she get a 1099R showing the loan default? 

Thanks! 

When was it deemed?  2020 or 2021?

16 minutes ago, BG5150 said:

When was it deemed?  2020 or 2021?

In 2020.

57 minutes ago, ratherbereading said:

In 2020.

The first question you're going to have to find out, then, is whether you can get the recordkeeper to issue a corrected 2020 1099-R. It may be difficult or impossible depending on their systems.

If the participant was a qualified individual, and the default occurred after the effective date of the CARES Act, then you could probably say that the final payment was deferred for 1 year. It would have to be increased with interest, of course. Notice 2020-50 said that the scheduled repayments had to begin in January 2021, but since there were no scheduled payments in 2021 I think you can make an argument that she would get a full year suspension from the original final payment date.

If she was not a qualified individual, and she is past the 5-year limit from the original loan date, then she is out of luck. However if she is still within the 5-year period, then the plan may be able to correct the defaulted loan under SCP by having her repay the amount with interest.

10 minutes ago, C. B. Zeller said:

The first question you're going to have to find out, then, is whether you can get the recordkeeper to issue a corrected 2020 1099-R. It may be difficult or impossible depending on their systems.

If the participant was a qualified individual, and the default occurred after the effective date of the CARES Act, then you could probably say that the final payment was deferred for 1 year. It would have to be increased with interest, of course. Notice 2020-50 said that the scheduled repayments had to begin in January 2021, but since there were no scheduled payments in 2021 I think you can make an argument that she would get a full year suspension from the original final payment date.

If she was not a qualified individual, and she is past the 5-year limit from the original loan date, then she is out of luck. However if she is still within the 5-year period, then the plan may be able to correct the defaulted loan under SCP by having her repay the amount with interest.

No 1099R was issued, it's just showing as Deemed. The loan was for 2 years and the client thinks it was paid off timely, but it wasn't, there is still $200 plus left.  Not sure if the CARES Act can come into place as no paperwork was filled out to defer the loan.  Thanks! 

My understanding is that if it was deemed, then a 1099R should have been issued.  The loan can be paid off, but then it creates a basis which will need to be tracked properly.  Depending on the loan provisions, if the participant ever wants to take a new loan out, they generally would need to pay this loan off first to do that.

12 hours ago, R Griffith said:

My understanding is that if it was deemed, then a 1099R should have been issued.  The loan can be paid off, but then it creates a basis which will need to be tracked properly.  Depending on the loan provisions, if the participant ever wants to take a new loan out, they generally would need to pay this loan off first to do that.

Thank you! 

If the loan was only for two years, you should be able to correct under SCP. See RP 2019-19, Section 6.(.07)(3)(d).

I'd be concerned why a 1099-R was not issued.

Are you sure it wasn't merely defaulted and not deemed?

The term 'deemed distribution' implies the participant received proceeds and should be taxed on them.