When Does a Participant Loan Become a Deemed Distribution?

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 www.irs.gov/retirement-plans/deemed-distributions-participant-loans.


For any further questions, please do not hesitate to email Wellspring Financial Partners at info@wellspringfp.com or call 1 (844) 203-2402.

This material was created to provide accurate and reliable information on the subjects covered but should not be regarded as a complete analysis of these subjects. It is not intended to provide specific legal, tax or other professional advice. The services of an appropriate professional should be sought regarding your individual situation. ACR# 3860268 10/21. A proud member of RPAG.