What happens if a plan loan is not repaid according to its terms?

Posted on: July 15th, 2014

A loan that is in default is generally treated as a taxable distribution from the plan of the entire outstanding balance of the loan (a “deemed distribution”). The plan’s terms will generally specify how the plan handles a default. A plan may provide that a loan does not become a “deemed distribution” until the end of the calendar quarter following the quarter in which the repayment was missed. For example, if the quarterly payments were due March 31, June 30, September 30 and December 31, and the participant made the March payment but missed the June payment, the loan would be in default as of the end of June, and the loan would be treated as a distribution at the end of September.

(Reg. Section 1.72(p)-1, Q&A-10(a))

If your 401(k) plan or 403(b) plan has made loans that haven’t complied with plan terms about loans, find out how you can correct this mistake.

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