 NEWSLETTERS Volume 9, Issue 1 .................... February 2009 LOANS IN DEFAULT When a participant takes a loan from a qualified retirement plan, they are borrowing monies from themselves. Taxes are not applicable. The participant is required to pay back the loan principal and interest per the terms of the loan, which were established when the loan was set-up. Loan payments are required to be made per the loan amortization schedule on a regular basis. If a participant fails to make all the loan payments due per the amortization schedule by the end of the quarter following the quarter they are due, the loan will be considered defaulted the first day following the end of the quarter after the quarter in which insufficient payments were made. For example, participant John takes a loan distribution of $2,000 and is required to make weekly loan payments of $15 beginning April 1st. Due to the payroll frequency being weekly, John is required to make 13 loan payments of $15 per quarter. During the quarter of April through June, John actually makes 11 loan payments. During the quarter of July through September John makes 13 loan payments. John’s loan is not defaulted because as of October 1st, John did make 13 loan payments, which were required to be made by October 1st for the quarter of April through June. If John were to stop making loan payments as of November 4th, his loan would default as of April 1st the following year. The quarter of October through December is the quarter in which insufficient payments were made. Therefore, the loan would default on April 1, which is the first day following the end of the next quarter. The plan sponsor is responsible for tracking loan payments and assuring they are made timely. If a participant terminates employment before a loan is repaid, a letter should be sent to the individual 30 days after the last repayment was made notifying the participant that the loan will be defaulted and the outstanding balance will be taxable. Contact your ARS Plan Administrator for a copy of this letter if the need arises. If a loan is defaulted, it is deemed taxable to the participant. The taxable amount is the outstanding principal plus interest accrued to date. When a loan defaults and is deemed taxable, the participant should receive a 1099-R for the taxable amount. If a loan defaults, notify Administrative Retirement Services, Inc. and the company that record keeps the loans. Note that if a participant has a defaulted loan, that loan is considered outstanding until it is repaid, even though it was deemed taxable. Therefore, if the plan limits loans to one outstanding loan at a time, a participant with a defaulted loan can never take a second loan until the defaulted loan is repaid in full.
If you have any questions about
loans in default, contact Administrative Retirement Services, Inc. © Administrative Retirement Services, Inc. 2009 Published by Administrative Retirement Services, Inc., Copyright 2001 by Administrative Retirement Services, Inc. Reproduction in whole or in part is prohibited except by written permission. All rights are reserved. Information has been obtained by Administrative Retirement Services, Inc. from sources believed to be reliable. However, because of the possibility of human or mechanical error by our sources, Administrative Retirement Services, Inc. or others, Administrative Retirement Services, Inc. does not guarantee the accuracy, adequacy, or completeness of any information and is not responsible for any errors or omissions or the result obtained from the use of such information. Readers should seek specific advice before acting with regard to the subjects mentioned here. |