When Does a Participant Loan Become a Deemed Distribution?
- By:
- CG Financial Services
- Date:
- January 5, 2022
- Classification
- Executive Benefits · Article
Learn when a retirement-plan participant loan may become a deemed distribution and what repayment, amount, and documentation rules apply.
Historical insight — Originally published January 5, 2022. Preserved as historical content; information may have changed.
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.
The complete IRS Issue Snapshot is at IRS Issue Snapshot: Deemed Distributions to Participant Loans.
About the Author
CG Financial Services
CG Financial Services helps individuals, families, and business owners align financial decisions with long-term purpose. For more than 25 years, its multidisciplinary team has brought together financial planning, wealth management, tax strategy, insurance, and estate planning—listening first, simplifying complexity, and advocating for clients at every step.
