Practice Management
Editor's Note: This is the third installment in a series concerning correcting plan loan failures.
Q. Full-time participant is making loan payments regularly and then changes to “on-call” status. Loan payments become sporadic; for example, 2 required payments made during the quarter, one in January and one in March. Participant does not make up missed loan payments in between the various payroll deductions. When does the clock start ticking when payments are missed sporadically?
A. In general, once a payment is missed the clock starts. However, the IRS permits a plan to apply a payment to a previous month to avoid default. For example, in your situation, assuming the plan applied the maximum grace period, the employer could apply the March payment to February and then the May payment could cover the March payment. This approach can work for a while, but if the participant does not get on a steady repayment schedule, there will be a payment that is not made up by the end of the grace period. In that situation, you have a loan default and a deemed distribution. The plan will need to correct or issue a Form 1099-R.
Editor’s Note: This content is taken from “Loans: Correcting Taxation, Qualification and Fiduciary Failures,” an April 15, 2020 ASPPA Webinar presented by
Stephen W. Forbes J.D., LL.M. of Forbes Retirement Plan Consulting.
Opinions expressed are those of the author, and do not necessarily reflect the views of ASPPA or its members.
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