What is the correction in the following situation: Participant takes loan of $40,000. Participant had no outstanding loans. But participant's highest balance of a loan in 12-month period preceding the loan was $12,500. Can this be corrected under APRSC? Can this be corrected by having the participant repay $2,500 and reamortizing the remaining amount? What happens if the participant refuses to cooperate with the correction (repay the $2,500)?

I"m not sure about correcting it under APRSC, but if the participant doesn't correct it, the entire loan is reportable under section 72. I would allow the participant to repay the amount.

see Q & A 113 in the Q&A for Plan Defects column on BenefitsLink (click). It addresses the issue of allowing to many loans, but I think the same logic would apply. APRSC would seem to be available, possibility of treating the loan as an in service distribution, etc.

[This message has been edited by Dave Baker (edited 11-02-1999).]

In this case, would the excess amount of the loan be considered a deemed distribution? Would there be a prohibited transaction in the amount of the excess for which a 5330 would need to be filed?