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Wednesday, February 13, 2013

With a down economy, many employers are seeing an increase in loan requests from retirement plan participants.  With an increase in loan requests comes an increase in loan administrative concerns.  In fact, IRS officials have informally stated that they are seeing an increase both in loan applications and in loan defaults.

One way to help head off administrative issues at the pass is to do a quarterly loan checkup.  Plan sponsors should check with their third party recordkeepers on a quarterly basis to check on the status of any loans for which payment is not current.  Ideally, this checkup should occur a month or six weeks before the end of the calendar quarter to allow time to correct any loans that could inadvertently go into default (such as when a plan sponsor fails to process loan repayment elections due to a payroll error).

Plan sponsors may also want to consider checking up after the end of the quarter to make sure that any loans that went into default have either been offset from the participant’s account balance or are on a list to be treated as a deemed distribution.  In addition, plan sponsors should check up in January of each year to make sure that all offsets and deemed distributions are appropriately recorded on Forms 1099-R.  While such a checkup is not explicitly required, it is a good practice to head off possible issues down the road.  Furthermore, IRS officials have recently stated that they are focusing on reviews of internal controls as a part of plan audits.  By doing this checkup, plan sponsors may be able to avoid having difficult loan issues that would require voluntary correction filings with the IRS and will save themselves headaches if they are audited.

Disclaimer/IRS Circular 230 Notice

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