What does it mean for a loan to deem?

deemed distribution
Whether due to a participant or an administrator error, a loan that goes into default is a deemed distribution of the entire unpaid loan balance plus accrued interest results.

Do I have to pay back a deemed 401k loan?

Since a deemed distribution of a loan is taxable to the participant, any loan repayments to the plan after a deemed distribution has occurred create (or increase) the participant’s tax basis under the plan (Treasury Regulation Section 1.72(p)-1, Q&A-21).

Are loans treated as distributions subject to 10 penalty?

Loans that exceed the maximum amount or don’t not follow the required repayment schedule are considered “deemed distributions.” If the loan repayments are not made at least quarterly, the remaining balance is treated as a distribution that is subject to income tax and may be subject to the 10% early distribution tax.

What is a participant loan?

A participant loan is when an eligible employee of a plan removes money from their 401(k) account, with a promise to pay it back with interest, within a specified time period.

When is a loan considered a deemed distribution?

A loan taken from an employee benefit plan that is in default is generally treated as a taxable distribution from the plan of the entire outstanding balance of the loan – a deemed distribution. A company’s plan’s terms will generally specify how the plan handles the default.

What makes a deemed distribution under Section 72 ( p )?

(ii) Under section 72 (p), the participant has a deemed distribution of $20,000 (the excess of $70,000 over $50,000) at the time of the loan, because the loan exceeds the $50,000 limit in section 72 (p) (2) (A) (i). The remaining $50,000 is not a deemed distribution.

Can a deemed distribution be rolled over into a retirement plan?

A deemed distribution is not treated as an actual distribution for purposes of determining whether a plan satisfies the restrictions on in-service distributions applicable to certain plans. In addition, a deemed distribution is not eligible to be rolled over into an eligible retirement plan. 7.

When does interest accrue after a deemed distribution?

These new proposed regulations provide that once a loan is deemed distributed under section 72 (p), the interest that accrues thereafter on that loan is not included in income. [This treatment applies for purposes of determining the amount taxable under section 72 (including application of return of tax basis).