A loan was issued incorrectly in the following manner. A participant had a vested balance of 32,000 and an outstanding loan of 9,000. The participant wanted to refinance the loan and the new refinanced loan was issued for the amount of 10,000 (9,000 of old loan and 1,000 of new addition). This would be over the limit of the available loan amount.(19,000>16,000) How is this corrected?

By stating that the limits were exceeded, I am assuming you looked at the payoff dates, and the new loan term ends after the old loan. That being said and going on the basis that the limits were exceeded, I am not sure there is a way to legitimately correct the error and avoid $3,000 of the loan being a deemed distribution.

I suppose you could ascertain that it was TPA error and "correct" the term, by shortening it to the original ending of the old loan, but I see that as merely a duck and cover maneuver without true merit.

Yes, that is the case. I figured a 1099 would have to be issued for a deemed distribution. Is there anything else that would have to be done?

I am looking in the ERISA Outline Book and I see Sal talks about this situation. He also says if the original principal amount is paid off by in the new loan by the orginal maturity date then there is no deemed distribution. I am reading this correctly? Q&A 20(a) of 72.(p)-1 is referenced.

I am not sure where you are referencing in the book, but I think I understand what you mean. I think a numerical example might help as applied to your situation.

If the $9,000 remaining original loan was due to be paid off 12/31/06 and the $10,000 replacement loan was due to be paid off 12/31/08, then you can disregard the $9,000 as it applies to the loan limits if in the amortization schedule, the $9,000 was still paid off by 12/31/06, and then the remaining amount paid off by 12/31/08. In other words, there would be unequal repayments over the course of the loan.

At least that's my understanding of the rules, albeit, a rudimentary understanding.