I understand that a participant can elect a direct roll over of his account balance, including outstanding loan notes, to another eligible plan. Has anyone encountered any traps for the unwary in where loans are rolled over to a different plan?

Most plans will not accept a loan note as part of a direct rollover.

As an alternative, a participant can do the following (assuming he or she has a $12,000 total account balance consisting of $10,000 invested in the Plan and a $2,000 outstanding loan):

1) request a direct rollover of the $10,000
2) come up with an additional $2,000 and roll it into the plan (be careful of 60 day rule)
3) take a loan from the new plan for $2,000 (or some other amount as the participant desires)

The plan sponsor in this case wants to amend the plan to accept rollovers that include loans. The regulations and IRS guidance contemplates that it can be done, but if you're not careful and you do something that will cause a change in the substantive terms of the loan, then the loan may be considered a "new loan,"and you would have to reassess whether the loans satisfy the requirements of the Code. This can be a severe problem if any of the loans are pre-TEFRA or TRA '86. An example is if you cause a change in the payment schedule that results in an extension of the repayment period. Has anyone encountered other problems?

How about the Plan issuing the rollover? Will the Plan sponsor roll the loan and issue the appropriate 1099-R?

The issuing plan's consultants advised that they will file all appropriate forms and will terminate the plan thereafter.

What is the correct 1099R reporting in this example for the company making the distribution?

Does the the plan accepting a loan receivable provide any statement to the employee for tax reporting purposes to show that the taxable portion (loan balance) is being paid under the new plan?