IRS Proposes Regulations on Pension Plan Loans

Washington, DC, January 12, 1998 - The Internal Revenue Service has published proposed regulations regarding the tax treatment of qualified employer plan loans to participants after they are deemed distributed. A loan typically is deemed distributed from the plan as a result of a default on loan repayments. Specifically, 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.

Additionally, the proposed regulations provide that because a defaulted loan amount is treated as distributed for purposes of Section 72, neither the income that results from the deemed distribution nor the interest that accrues thereafter increases the participant's investment in the contract (the tax basis) for purposes of Section 72. Moreover, the additional interest is not treated as an additional loan, and thus, does not result in an additional deemed distribution. The loan and any interest that continues to accrue on it, however, are still considered outstanding for purposes of determining the maximum amount of any subsequent loan available to the participant.

The proposed regulations also provide that if the participant repays the loan after a deemed distribution of the loan, then the participant's investment in the contract, i.e., the tax basis under the plan, increases by the amount of repayments. Loan repayments, however, are not treated as after-tax contributions for other purposes.

This proposed regulation will apply to loans made on or after the first January 1 that is at least 6 months after the date of the final regulation. With regard to loans made before this effective date, a plan is permitted to apply the proposed rules to such loans provided conditions set forth in the guidance are satisfied. A series of examples demonstrates the applicability of the guidance to specific factual situations.