In today’s episode, we talk about new opportunities from the IRS to self-correct plan participant loan errors, which previously were the fourth most common error found in the IRS’s more complex Voluntary Correction Program.
Speaking of Benefits, this is Jim Paul.
In today’s episode, we’ll talk about some good news from the IRS. We’re not kidding. The IRS has added some helpful new features to the Self-Correction Program. In certain limited situations you can now fix late amendments or make corrections by retroactive amendment. But the most useful feature allows for self-correction of plan loan failures.
Under the Self-Correction Program, a defaulted loan can now be self-corrected by:
- Re-amortizing over the original loan term; or
- Having the participant catch up with a lump sum for the late payments and interest;
- Or those two methods can be combined.
To use this correction method:
- You must meet all other requirements for self-correction;
- The failure must be insignificant or must be corrected within two years; and,
- The loan must be repaid within the original term. Generally, that would be 5 years.
If properly corrected, the participant won’t have a taxable deemed distribution and no Form 1099-R needs to be issued.
There are also two other new features available for correcting plan loans.
The first is if a loan is not timely corrected and is discovered later. That can be reported in the year it’s treated as a deemed distribution, rather than the year in which the default occurred. This means the plan sponsor can issue the Form 1099 in the current year, and the participant won’t have to go back and amend their prior year tax returns.
If the participant has taken more loans than the plan allows, the plan can now be retroactively amended to allow additional loans. If this method is used, the increased limit on loans must apply to all plan participants, or at least to all non-highly compensated participants. And the plan must still satisfy the statutory loan requirements.
Speaking of benefits, this is Jim Paul. If you would like specific guidance on this topic, let’s start a conversation.
This podcast is for general informational purposes only. It does not create an attorney-client relationship between the Employee Benefits Law Group and the listener or reader and does not constitute legal advice for a specific situation.