In addition, for purposes of calculating the maximum permitted amount of any subsequent loan, a loan that has been deemed distributed is considered outstanding until the loan obligation has been satisfied. However, the proposed regulations provide that if a participant makes any cash repayments on a loan after the loan is deemed distributed, the repayments increase the participant's tax basis in the plan in the same manner as if the repayments were after-tax contributions.Ī loan that is deemed distributed under section 72 is nevertheless outstanding for other purposes until the loan obligation is satisfied (e.g., by cash repayment or by offset against the participant's accrued benefit). The fact that a deemed distribution occurred in 1994, and income taxes were paid at that time, does not give the participant any tax basis in his account. In this case, the participant would have a taxable distribution in 1998 for the remaining account balance reflecting the non-loan assets that are distributed in a lump sum. At separation from employment in 1998, the participant's vested account balance is reduced (offset) by the loan amount and the remaining account balance is distributed in a lump sum to the participant. The participant's total account then consists of non-loan assets and a receivable for the loan balance. These new proposed regulations provide that once a loan is deemed distributed under section 72(p), the interest that accrues thereafter on that loan is not included in income.įurther, because the loan amount is treated as distributed for purposes of section 72, neither the income that resulted from the deemed distribution nor the interest that accrues thereafter increases the participant's investment in the contract (tax basis) for purposes of section 72.įor example, assume that, after a loan has been made from a defined contribution plan to a participant, a deemed distribution occurs (let's say in 1994) as a result of failure to make timely loan repayments as required by section 72(p). In a public hearing in June 1996, one of the issues on which comments were received was the effect of a deemed distribution on the tax treatment of subsequent distributions from a plan (such as whether a participant has tax basis as a result of recognizing income).
Regulations were proposed in 1995 with respect to many of the issues arising under the deemed distribution rules. Specifically, a loan from a qualified employer plan to a participant or beneficiary is not treated as a distribution from the plan if the loan satisfies requirements relating to the term of the loan and the repayment schedule, and to the extent the loan satisfies certain limitations on the amount loaned. However, the "deemed distribution" treatment does not apply to the extent certain conditions are satisfied.
#Turbotax loan treated as deemed distribution code
Section 72(p) of the Internal Revenue Code provides that a loan from a qualified employer plan to a participant or beneficiary is treated as received as a distribution from the plan for purposes of section 72 (a deemed distribution), and it further provides that an assignment or pledge (or an agreement to assign or pledge) of any portion of a participant's or beneficiary's interest in a qualified employer plan is treated as a loan from the plan. Many plan administrators know that a plan loan in default is reported as a deemed distribution, but did you know that those deemed loans are not extinguished? They must be tracked, the balances increase due to unpaid interest, and they have real consequences for the plan and the participants for as long as the loan remains unpaid. Loan Does Not "Go Away" after Deemed Distribution
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