Editor's Note: This is the fourteenth installment in a series concerning correcting plan loan failures.
Q. A plan uses an automated clearing house (ACH) to repay loan. Loan goes into default when participant has insufficient funds for loan repayment. Under the new loan correction rules, may a plan use the reamortization correction option for a loan which uses ACH to repay the loan (or, is it limited to plans that use payroll deduction)?
A. Although it is less likely that an employee using ACH to repay a participant loan will cooperate in self-correcting a loan failure, IRS Employee Plans Compliance Resolution System (EPCRS) does not preclude a plan using ACH from self-correcting a loan failure by reamortizing the loan over what is left of the 5-year loan repayment. I suspect that when some employees realize the tax consequences, including the premature distribution tax, they may get "religion" and cooperate with the employer on the self-correction option (reamortization). If not, the employer has the option of issuing the Form 1099-R for the year of correction (rather than the year of failure).
The question, however, brings up a valid point that should be emphasized. To effect a self-correction of a loan failure (employer or employee caused) using reamortization or a lump sum payment of the missed payments, the employer will need the cooperation of the participant.
The plan sponsor (plan administrator) retains the authority as to how and whether to implement an EPCRS correction option. In other words, it is not the employee's decision.
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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