401k loand deemed defaulted without any notification

[sanju747]

What is the name of your state (only U.S. law)? CA


I had a 401k loan...when i moved (2 yrs ago), apparently the direct withdrawl of the payments stopped and subsequently the plan was taken over by a new company due to the merger/acquisition of my pervious employer

I had zero communication from the previous or new plan administrator or asset manager until couple of days ago where my loan was put into default and the remaining balance was tagged as deemed distribution

I would like to know

- do the plan administrator and/or asset manager have to communicate with plan participant/s in regards to the loan default or if the payment stops due to change in administrator or asset manager

- are there ways to rectify the situation

- as a plan participant could i request any audit documents as well as 5500 to review how or when the plan made the decision to default the loan

Would greatly appreciate a reply

Thanks.

S

 

[swalsh411]

It is ultimately the responsibility of the person who owes the money to ensure that their balance is being paid down in accordance with their loan terms. You should have noticed when the deductions stopped coming out of your check. Although many do and it's a nice service for the employees, I 99% sure that plan sponsors are not required to send notices of pending default. (at least I am not aware of any such requirement).

You might be able to speak to the plan administrator about making the loan current again. It's worth a try at least.

The audit documents and 5500, even if you could get copies, would not help you figure anything out. It's not like people sit around a conference table and decide which loans are going into default and which are not.

 

[racer72]

You didn't notice that payments were not being deducted for 2 years?

 

[sanju747]

401k loan deemed defaulted without any notification

Did not pay attention as I moved multiple times during this time....and was given no guidance from the first place when i left regarding the repayment

In any case, are there any provisions to rectify the situation...either by repaying the loan in full, or doing an accelerated payment etc.

I read the following on the taxalmanac.org as well as on the IRS website and seemed there probably are some provisions but do not have the deep knowledge to fully understand the underlying guidance.

Would help if anyone can provide their thoughts on the following text

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There is information on TaxAlmanac under section 1.72 that talks under Q21 that talks about the participant paying the loan after the deemed distribution and appears the current situation I have can be fixed by this

Q–21: Is a participant's tax basis under the plan increased if the participant repays the loan after a deemed distribution?
A–21: (a) Repayments after deemed distribution. Yes, if the participant or beneficiary repays the loan after a deemed distribution of the loan under section 72(p), then, for purposes of section 72(e), the participant's or beneficiary's investment in the contract (tax basis) under the plan increases by the amount of the cash repayments that the participant or beneficiary makes on the loan after the deemed distribution. However, loan repayments are not treated as after-tax contributions for other purposes, including sections 401(m) and 415(c)(2)(B).
(b) Example. The following example illustrates the rules in paragraph (a) of this Q&A–21 and is based on the assumptions described in the introductory text of this section:
Example. (i) A participant receives a $20,000 loan on January 1, 2003, to be repaid in 20 quarterly installments of $1,245 each. On December 31, 2003, the outstanding loan balance ($19,179) is deemed distributed as a result of a failure to make quarterly installment payments that were due on September 30, 2003 and December 31, 2003. On June 30, 2004, the participant repays $5,147 (which is the sum of the three installment payments that were due on September 30, 2003, December 31, 2003, and March 31, 2004, with interest thereon to June 30, 2004, plus the installment payment due on June 30, 2004). Thereafter, the participant resumes making the installment payments of $1,245 from September 30, 2004 through December 31, 2007. The loan repayments made after December 31, 2003 through December 31, 2007 total $22,577.<p> (ii) Because the participant repaid $22,577 after the deemed distribution that occurred on December 31, 2003, the participant has investment in the contract (tax basis) equal to $22,577 (14 payments of $1,245 each plus a single payment of $5,147) as of December 31, 2007.


There is additional information on the IRS website around plan has to do reconciliation on the loan payments from an audit perspective and then informing the payee about missing payment or reactivating the payments. The information is under 401k guide
Here is the link, focus on item 9 page 4 which talks about the attempts on parts of the plan administrator for loan reconciliation;
http://www.irs.gov/pub/irs-tege/401k_mistakes.pdf#page=2

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Thanks.

Sandeep

 

[swalsh411]

So you moved multiples times by your own admission... and it is very possible you did not receive a notification of your loan going into default.

I would suggest contacting the plan administrator of the loan to see if anything can be done.

You seem to be blaming everybody but yourself for failure to notice that the payroll deductions did not continue.

 

[sanju747]

Not blaming anyone but trying to figure out if there are any solutions/ways to address the issue at hand.

Again, would appreciate if anyone can review the following from Tax Almanac and provide feedback

----
There is information on TaxAlmanac under section 1.72 that talks under Q21 that talks about the participant paying the loan after the deemed distribution and appears the current situation I have can be fixed by this

Q–21: Is a participant's tax basis under the plan increased if the participant repays the loan after a deemed distribution?
A–21: (a) Repayments after deemed distribution. Yes, if the participant or beneficiary repays the loan after a deemed distribution of the loan under section 72(p), then, for purposes of section 72(e), the participant's or beneficiary's investment in the contract (tax basis) under the plan increases by the amount of the cash repayments that the participant or beneficiary makes on the loan after the deemed distribution. However, loan repayments are not treated as after-tax contributions for other purposes, including sections 401(m) and 415(c)(2)(B).
(b) Example. The following example illustrates the rules in paragraph (a) of this Q&A–21 and is based on the assumptions described in the introductory text of this section:
Example. (i) A participant receives a $20,000 loan on January 1, 2003, to be repaid in 20 quarterly installments of $1,245 each. On December 31, 2003, the outstanding loan balance ($19,179) is deemed distributed as a result of a failure to make quarterly installment payments that were due on September 30, 2003 and December 31, 2003. On June 30, 2004, the participant repays $5,147 (which is the sum of the three installment payments that were due on September 30, 2003, December 31, 2003, and March 31, 2004, with interest thereon to June 30, 2004, plus the installment payment due on June 30, 2004). Thereafter, the participant resumes making the installment payments of $1,245 from September 30, 2004 through December 31, 2007. The loan repayments made after December 31, 2003 through December 31, 2007 total $22,577.<p> (ii) Because the participant repaid $22,577 after the deemed distribution that occurred on December 31, 2003, the participant has investment in the contract (tax basis) equal to $22,577 (14 payments of $1,245 each plus a single payment of $5,147) as of December 31, 2007.