#6
High Risk
Failure to Conform Participant Loans & Hardship Withdrawals
Participant loans must conform to plan documents and IRC Section 72, creating qualification defects if violated.
- Potential Consequences
- Qualification defects
- Prohibited transactions
- Plan corrections
- Loss of qualified status
- Prevention Tips
- Review plan document loan provisions regularly
- Ensure loan amounts don't exceed IRC limits
- Verify proper loan repayment schedules
- Document hardship withdrawal justifications
- Implement loan administration procedures
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Participant loans often don’t conform with the plan document and IRC section 72.
Review and follow plan provisions on loans, including the loan amount, term of the loan and the repayment terms. Additionally, be sure that there are procedures in place to prevent loans that are prohibited transactions.
If it is determined that a hardship distribution or participant loan has been made, and it does not conform to plan provisions, then a qualification defect arises and must be corrected immediately.
The correction can be made by requiring repayment of the loan or hardship distribution, or if this is not possible, then the plan sponsor must make the plan whole. Failure to do so may result in the plan losing its qualified status… its ability to defer taxes.
"It wasn't raining when Noah built the Ark."
— Howard Ruff
