I'm very new to this, and preparing a 5500 for a small pension plan. I have a question regarding whether a participant loan was a deemed distribution and whether it should be taxable. The administrator sent me information that one participant requested "the maximum withdrawal allowable under the plan for use with her down payment on the purchase of a primary residence." The plan provided the participant with a 1099R showing an amount of slightly more than $5,000 as the gross distribution and fed tax of approximately $1,000 withheld.

I've looked at 72(p), and it appears that this meets the exception in 72(p)(2) and therefore would not be considered a distribution. If it is not a distribution, was a 1099 and tax withholding necessary?

If the 1099 and tax withholding were not necessary, is there anything that the plan needs to do to "correct" this?

Was it a loan or was it a distribution?

Were loan papers prepared and signed by the participant?

Does the plan provide for in-service distributions?

Ultimately, the Plan Administrator must make the determination as to whether the payment was intended to be a distribution or a loan and to insure that the plan's provisions are fully followed in either case.

Sounds like hardship withdrawal to me. Also sounds like it was done properly and was indeed a distribution. Due to the fact tax was withheld, it could not have been loan check.