When Does A Loan Default Occur, and How Do I Handle It ? 


(Regarding Loans From Retirement Plans)

A loan default occurs if a participant's loan repayment is not made by the due date of any payment. If the missed loan repayment is not received by the last day of the calendar quarter following the calendar quarter in which the loan repayment was due (referred to as "cure period"), the loan is deemed distributed.

(i.e. a loan is due by Feb.1, and payment is not rec'd by Feb. 1 the loan is in default. If the missed 
payment is not then made by June 30, the loan will be deemed distributed)

loan whose "cure period" has not expired.  

Inform participant that full repayment of current outstanding delinquent payments are due by such in such date (whichever day quarter ends on 3/31, 6/30, 9/30, or 12/31) Collect the payments either through payroll deductions or personal check from the participant and include these amounts in the next contribution due before  the end of the calendar quarter following the calendar quarter in which repayments were missed.

LOAN WHOSE "CURE PERIOD" HAS EXPIRED

Loan amount is deemed distributed, please contact the designated plan representative to proceed with the proper paperwork and documentation. 

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AN EMPLOYER WITH A DEFINED BENEFIT PENSION PLAN WOULD LIKE TO KNOW IF A PLAN CAN REIMBURSE THE EMPLOYER FOR PLAN EXPENSES SUCH AS ANNUAL ADMINISTRATION FEES AND AMENDMENTS HE/SHE RECENTLY PAYED? 

If the plan document allows, the plan may reimburse the employer for current year plan expenses paid by the employer (prior year expenses cannot be reimbursed).

1099 REPORTS NET DISTRIBUTIONS - IF DISTRIBUTIONS COME OUT OF PARTICIPANTS ACCOUNTS, SHOULD THE 1099-R REFLECT THE AMOUNT INCLUDING THE FEE OR LESS THE FEE?

The 1099-R is for the net amount.  The distribution fee is a plan expense allocated to the plan participant.

Who is eligible to receive the $500 credit for adopting a qualified retirement plan?

EGTRRA allowed tax credits to small employers.  The 2006 PPA made this permanent.  A small employer for this purpose is an employer with no more than 100 employees who received at least $5,000 of compensation in the preceding year and that have at least one non-highly  compensated employee participating in the plan.

An employer cannot use the startup credit if it has maintained a qualified employer plan at any time within the previous three years.  The term "Qualified Employer Plan" means a plan qualifying under section 401(a), an annuity plan described in section 403(a), a simplified employee pension (within the meaning of section 408(k)), or a simple
retirement account (within the meaning of section 408(p)).

The credit is equal to 50% of the first $1,000 of administrative and retirement-education expenses they incur for each of the first three years after the adoption of a new plan. 

Auto Enrollment - Are there different types of automatic contribution arrangements for retirement plans?

Yes, besides the basic automatic contribution arrangement, a plan sponsor can choose an eligible automatic enrollment arrangement (EACA) or a qualified automatic enrollment arrangement (QACA).

1. An EACA is a type of automatic contribution arrangement that must uniformly apply the plan's default percentage to all employees after providing them with a required notice. It may allow employees to withdraw automatic enrollment contributions (with earnings) by making a withdrawal election as required by the terms of the plan (no earlier than 30 days or later then 90 days after the employee's first automatic enrollment contribution was withheld from the employees wages.) Employees are 100% vested in their automatic enrollment contributions.

2. A QACA is an automatic contribution arrangement with special "safe harbor" provisions that exempt a 401(K) plan from annual actual deferral percentage (ADP) and actual contribution percentage (ACP) non discrimination testing requirements. A QACA must specifiy a schedule of uniform minimum default percentages starting at 3% and gradually increasing with each year that an employee participates. Under a QACA an employer must make a minimum of either:

  • a matching contribution of 100% of an employee's contribution up to 1% of compensation, and a 50% matching contribution for the employee's contribution above 1% of compensation and up to 6% of compensation; or
  • a non elective contribution of 3% of compensation to all participants, including those who choose not to contribute any amount to the plan.

Under a QACA, employees must be 100% vested in the employer's matching or nonelective contributions after no more then 2 years of service.  A QACA may not distribute the required employer contributions due to an employee's financial hardship.