Skip to main content

Check out our 3Q2024 Market Review and Investment Outlook for the remainder of 2024

Deemed Loans Image

When Does a Participant Loan Become a Deemed Distribution?

Photo of author, Monica Garver, CPA, CFP®, AIFA®.
Monica Garver, CPA, CFP®, AIFA®
Director of Retirement Plan Services and Financial Strategist

A recent IRS Issue Snapshot (link below) affirms that 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. But plans may offer a cure period during the quarter following the quarter in which the missed loan repayment occurred.

A deemed distribution 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.

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

To see the complete IRS Issue Snapshot, please click HERE.

Related Insights
Nov Qualified Blog2 image

The Arrival of TDFs with Annuities

With participants thinking erroneously that there is a guaranteed paycheck built into their retirement plan, the production of an “Income Target Date Fund” has grown exponentially. Since 2020, some target-date series now include a form of guaranteed income, providing participants with a more predictable future. Learn more about the TDF with an Annuity.

Read More
Nov Qualified Blog3 Image

When It Comes to 401(k) Beneficiaries, Where There’s a Will There Isn't Necessarily a Way

Beneficiary designations are a critical yet often neglected aspect of retirement plans. Many participants mistakenly believe that their retirement plan assets will be distributed according to their will or trust. However, retirement accounts are governed by their own rules, meaning the named beneficiary on the account will typically inherit the funds, regardless of other estate planning documents. Learn more

Read More
Nov Qualified Blog1 Image

The Road to 15%: Helping Participants Navigate Toward Retirement Readiness

Many advisors recommend saving 15% of pre-tax earnings, including any employer match, to prepare for a secure retirement — but to accomplish this, timing is crucial. According to Forbes, savers need to begin by age 35 to retire comfortably by age 65; to retire by age 62, they’d need to get started by 25. Looking under the hood at participant data allows plan sponsors to better tailor strategies that help participants accelerate savings goals — and avoid financial speed bumps along the way.

Read More
Play