When Does a Participant Loan Become a Deemed Distribution?

Written By Anthony Powers

A recent IRS Issue Snapshot (link below) affirms a participant loan is a legally enforceable agreement and terms of the loan agreement must comply with Internal Revenue Code (IRC Section 72(p)(2) and Treasury Regulation Section 1.72(p)-1). The terms of the loan agreement must be explicit in writing or deliverable electronically.

A loan in default is considered to be a deemed distribution, which can occur at the date the loan is made, if:

  • Participant loans exceed the maximum dollar amount of $50,000

  • Payment schedules do not comport with time or payment amortization requirements, or

  • The loan agreement is either not legally enforceable or does not exist.

If any of the above requirements are not met, the loan would be determined to be in default and will be considered a deemed distribution. However, plans may offer a cure period during the quarter following the one in which the missed loan repayment occurred.

A deemed distribution is accompanied by immediate tax consequences to the participant.

The complete IRS Issue Snapshot is at www.irs.gov/retirement-plans/deemed-distributions-participant-loans.

Anthony Powers
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