After substantial review of pension plan loans I have uncertainty as to how to administer the plan in relation to the affected plan participant after the loan is considered a deemed distribution.

Say a participant takes a $50,000 loan on 7/1/2002 and does not pay off the loan in compliance with the level amortization payment by not making his first required payment(s).

Therefore, as of 7/1/2002 the participant should be charged with a deemed distribution for $50,000.

After this occurs and the participant decides to pay back the loan say at 6/1/2005, then it would seem that the amount to pay back would be $50,000 plus interest at the loan interest rate. Say it turns out to be $75,000. Then it would appear that the participant would have basis in the benefit in the amount of $75,000.

So that if say the participant were to take a lump sum of $200,000 at termination date of 1/1/2008, then $75,000 would not be subject to tax and not be eligible for rollover, but the remaining $125,000 would be subject to tax and eligible for a direct rollover.

Is this analysis correct?

And finally say the participant never pays back the loan and terminates at 1/1/2008 with a lump sum value of his accrued benefit of $200,000.

How would this transaction be handled?

SHould the value of the deemed distribution be increased with interest until 1/1/2008 (to say an amount like $100,000 for example purposes) and then such amount be basis that is offset to the $200,000, where then $100,000 is either distributed or rolled over?

Thanks.