We have a plan that only allows for one loan to be outstanding. Somehow, the plan granted a second loan to a participant in error. How do we correct this? Plan refuses to permit two loans. This appears to be a prohibited transaction and an operational error because the plan does not permit in service distributions. ERISA Outline states that in order to correct the prohib transaction you have to cancel the loan and repay the plan. Does the plan sponsor have to repay the distribution to the participant's account if we cannot collect the unauthorized loan back from the participant? Does it then become a loan between the employer and the participant? Do we issue a 1099R to the participant? Any guidance would be helpful!

Correct under VCP (Rev. Proc. 2008-50) and amend the plan to allow for 2 loans retroactively (which Ii think you will be able to do).