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Compliance Corner

Retirement Updates

IRS Releases Issue Snapshot on Deemed Distributions of Participant Loans

October 12, 2021

On September 28, 2021, the IRS released an issue snapshot on deemed distributions of participant loans. Issue Snapshots represent the IRS’ periodic research summaries on tax-related issues. This snapshot discusses the compliance failures that will cause a participant loan from a retirement plan to be treated as a distribution for tax purposes.

Regulations require participant loans to meet certain requirements. Namely, loans must be operated pursuant to a legally enforceable agreement that provides a repayment schedule with level payments that occur no less frequently than quarterly. The loans must be limited to the lesser of $50,000 or the greater of 50% of the participant’s vested benefit or $10,000. The loan repayment term must also be limited to five years.

If those requirements are not met, then a deemed distribution occurs and the participant will have to pay taxes on the loan amount. The snapshot discusses the cure period that a participant may avail themselves of in the event of a late payment and the CAREs Act relief that allowed participants to take larger loans.

The snapshot provides tips to employers on how to comply with the retirement plan rules and indicates how an IRS investigator would approach certain compliance failures.

Deemed Distributions – Participant Loans »

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