Terminating employees that do not pay off their loans and the loan is called......is the loan offset shown on Schedule H (or I) as a "benefit payment directly to participant" or a "deemed distribution". The 5500 instructions are not clear to me. However, logic tells me that the only loans that should be reported as a "deemed distribution" are those that violate 72(p), i.e. participant stopped paying and is still working, amount of loan too high, etc. The above example is not violating any provisions of 72(p) since a distributable event has occurred.

I have always reported such loan defaults as a regular distributions, but reviewing the 5500 of an audited takeover plan made me question this issue.

Are these terminated EEs given the promissory note as part of the total districtuion? If so, I think they are actual distributions because the loan is in the process forgiven. For example, the promissory note ought to actually be delivered to the EE.

Or, are these terminated EEs defaulting on loans that are part of their undistributed benefits? If so, I think they are deemed distributions.

Hi Brenda,

We treat those loans as offset as well and have also had takeover plans where the Sch H reflects defaulted loans under the deemed section.

I have had many accountants preparing the audit report who want the loans moved under the "deemed" section. I go through the explaination as to why it is an offset (distribution) and not deemed. Sometimes it takes a few times for me to get through ; but ultimately they have agreed with me!!

To me, the bottom line is:

Is the loan still being carried as an asset? Deemed.

Is the loan no longer being carried as an asset? Distribution.

The Plan Document &/or Loan Policy should address how these situations are handled. Most usually allow for the loan to be offset (paid off) upon distribution of a participant's vested balance, but worth double checking the documentation on this.