IRS Updates EPCU Project on Terminated Plans with Outstanding Loans
The IRS Employee Plans Compliance Unit (EPCU) has updated the information concerning its project on terminated plans with outstanding participant loans
Through the project, the EPCU is attempting to determine if outstanding loan balances at the time all plan assets were distributed were treated properly for income tax purposes.
Unless the loans were issued from a designated Roth account or other after-tax employee contribution, participants must recognize their outstanding loan balances as taxable distributions at the time all trust assets are distributed. The amount of a participant’s outstanding loan balance that’s taxable income must be reported in box 2a on a recipient’s Form 1099-R.
To gather information on these loans, the EPCU is sending 200 compliance check letters randomly to plans that terminated and that indicated on their final Form 5500-series returns that their plans had investments in participant loans.
The person with primary responsibility for the day-to-day administration of your employee benefit programs should provide the requested information; he or she also may furnish any other documents or clarifying material that may be helpful for the EPCU to review. Failure to provide the information requested could result in further action or examination of your return. It is possible to request additional time to provide the information.
The EPCU is using the questionnaire responses to determine:
- identities of participants, beneficiaries and alternate payees who had unpaid loan balances at the time all the plan assets were distributed;
- amounts of the unpaid loan balances for each of these participants, beneficiaries and alternate payees; and
- total distributions received by these participants, beneficiaries and alternate payees.
If the EPCU determines that outstanding loan balances were taxable distributions but were not reported as taxable on Forms 1099-R, the plan sponsor will be asked to file amended Forms 1099-R and advise the affected payees to amend their respective income tax returns. If the plan sponsor appears to be compliant, or if necessary corrections are made, we will issue a closing letter notifying the plan sponsor that the compliance contact has been resolved.
The IRS will use the information the EPCU gathers from this project to prepare a report that will identify areas about which it should provide additional education, guidance or outreach.