I hate asking this question, but what risk is an employer taking by not following the deemed distribution rules?

2 specific examples where an employer does not want to follow deemed distribution rules:

1. Participant is a few days beyond the grace period on a 3-year loan due to being out on leave. Employer would like to either reamortize loan or allow participant to double up on payments until caught up on the loan and does not want to report a deemed distribution.

2. Participant takes a 20-year loan for a principal residence. 6 months later, employer discovers loan was for property on which a residence might be built later. Employer would like to reamortize the loan over 4 1/2 years and not treat the loan as a deemed distribution.

I have talked to other practitioners that don't seem to have too much of a problem with the above.

Yes, I know the rules are the rules. But I would like to know what risks the employers would be taking (and should be advised of) by not following the deemed distribution rules. Is it a plan qualification issue?

No comment on the specific circumstances in your message. But if a deemed distribution occurs, the plan at least has a reporting requirement. A Form 1099 must be issued. Failure to handle and report distributions properly deprives the public of tax revenues. It may even be a tax evasion conspiracy. Don't take reporting requirements lightly. Also, sometimes botched loans can lead to disqualification. S corporations come to mind.