Loan Repayments Withheld but Not Deposited

Editor's Note: This is the thirteenth installment in a series concerning correcting plan loan failures. 

Q. Beginning in July 2018, payments for an existing loan continued to be withheld from pay, but were not remitted to a trust account. A Form 1099-R was issued in January 2019 on the “defaulted” loan. The error was discovered in March 2019 and all loan payments were forwarded to the trust on March 25, 2019. Does the plan sponsor need to file through both the IRS Voluntary Correction Program (VCP) and the DOL’s Voluntary Fiduciary Correction Program (VFCP), along with a Form 5330? Should it issue a revised Form 1099-R for 2019 or 2018? 

A. If loan repayments were withheld but not deposited, the plan does not have an Internal Revenue Code Section 72(p) failure (i.e., payments were timely made to a fiduciary of the plan). Therefore, no correction through the IRS Employee Plans Compliance Resolution System (EPCRS) needs to be made (i.e., no Form 1099-R should have been issued).

However, the failure to deposit the loan payments timely is both a prohibited transaction and a breach of fiduciary duty. You may resolve the failure under the VFCP. Some practitioners use the VFCP methodology for correction but do not file. In such a case, the employer should note the correction on its Form 5500 filing.

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.