We have a plan whose document allows for participants to have only one loan outstanding, refinancing is not prohibited.

A participant took a loan in August 2006 (5 year re-payment period) with weekly payments (all payments are current). Same participant requested and received a 2nd loan in February 2009 (current plan year). Also for a 5 year re-payment period and to-date, all payments are current (participant is not a key employee). The same participant did have a sufficient vested account balance at the time the 2nd loan was taken to allow a refinancing of the original loan plus additional amount requested for a new 5 year repayment period in accordance with IRC Section 72(p)(2)(B) & (C). The company does not want to allow more than one loan in the future - this was a one time error.

Obviously this is an operational error. My question is on the proper correction method to fix the error. May this be corrected through the EPCRS Self Correction Program with a plan amendment, in the same manner as would a plan that issued a loan to a participant but did not have loans available in the plan document? Or, would the plan be required to correct the error with an amendment through VCP?

Has anyone ever seen this type of error and corrected in another manner (besides deeming the 2nd loan as a distribution)?

thanks,

As I recall if this type of correction by retroactive amendment is not specifically listed in the Rev. Proc. as eligible for self-correction, then you must go for VCP if you need/want relief under EPCRS. (I don't remember if it's on the list or not.)

However, if the second loan was taken during the current plan year, is it clear that you need any relief if a conforming, retroactive amendment is adopted befoe the end of the plan year? Assuming the borrower was not an HCE at any time during the plan year up to the date of the loan, I think an argument can be made that there is no operational error requiring relief if the amendment is adopted before the end of the plan year. If you can implement a loan program for all employees during a plan year as long you amend the plan to permit loans before the end of the plan year (and I think you can do that), then you should be able to solve this problem without EPCRS by amending the plan before the end of the plan to permit Participant X to take a second loan on Month Date, 2009.