Scenario: Participant terminated employment March 2004 and stop making loan payments. Participant was rehired in May 2004 and did not have payroll deductions for loan start again.

The loan policy states that the loan will be offset at termination within a reasonable period of time after termination. Reasonable period of time is interpreted as being "90 days from date of termination" at which point the TPA firms processes the offset and sends a 1099-R to the participant.

It is now the end of July and payments still have not resumed. The end of the cure period was 6/30/04, so the participant must be taxed.

Questions:
Should this loan be considered a deemed distribution, or a loan offset? I was always of the opinion that there had to be a current distributable event for the loan to be offset. This participant is an active employee now.

OR, can you offset the loan and say the participant had a loan offset during the "termination period", but that the 1099-R was just issued?

Any comments are appreciated.

Anyone???

Had the person not been rehired, the distribution would not have occurred until June. The person would have been entitled to a distrbution in June. Evidently the person did not take a distribution of other amounts before rehire. As of June the person was not entitled to a distribution. The person could not get a distribution of other assets in June. I don't see how one could get to an offset distribution in June or later or argue that a distribution occurred earlier than June. As always, plan terms should be considered, but you appear to have covered the terms and the established interpretations.