my client had a participant that termd in nov 2003. he had an outstanding loan balance. the plan doc states that the loan is due and payable upon termination. if the employee does not pay the loan back, should the 1099r be issued for 2003 or 2004(if there is a 90 grace period to pay it)? i just don't know when the loan technically is in default.

thanks for any help.

I would say the loan is in default when it goes past the cure period.

The 1099 should be issued in 2004 when you process the offset. An offset is an actual distribution, so a tax notice should be provided to the participant as well. My opinion for what it matters.

does the employer have to allow for a cure period if the employee is terminated? can we make any arguement that the 1099r can be issued in 2003?

If the plan provides for an "offset" at termination, then I don't think that you'd have to wait until the end of the cure period. The cure period only applies for purposes of the "deemed distribution" rules. If under the plan you have an "actual distribution" in the form of an "offset," then the loan would never even go into default and the cure period wouldn't apply. So it would then be possible to have a 2003 Form 1099-R. But in my experience the wording of the loan policies is often awkward -- and its not always clear which occurs first, the offset or the default. E.g., some plans don't have the offset immediately -- they might wait until a cash distribution or something. Then the deemed distribution rules might kick in first.

Here is a little snippet from Sal's ERISA Outline book. Chapter 7: Taxation Rules - Section IX (Participant loans): Part E (Offsetting accrued benefit/delayed offset after default)



Don't suppose the loan policy states this?