How does the plan report a defaulted loan?
It depends on whether participants are active or terminated:
- Active participants: Form 1099-R is issued and the loan remains on the recordkeeping and trust system until the participant terminates. This is in accordance with IRS rules and is called a “deemed distribution.”
- Terminated participants: Form 1099-R is issued and the loan is treated as a distribution and removed from the participant’s account balance even if the participant chooses to defer distribution of the mutual fund investments.