Client Defaulted on TSA loan

Submitted by Geoffrey Kasher on Tue, 2020-05-19 20:50

Client worked for a local school board for years and was contributing to his TSA. Last contribution was 10/2006.

He took a loan from the TSA and defaulted on it in 2001.

He has never repaid the loan and still has the TSA, with MetLife, active. The account balance is about 78l with an 11k loan.

Every year, probably since he defaulted has has received a 1099 which he included with his tax returns.

He now wants to distribute the TSA and knows that the 11k will be held back to repay the loan.

Will he get a 1099 for the distribution? And will the distribution be taxable?

He thinks that he will not owe any additional tax since he has been including the 1099’s every year and paying the tax.

I’d appreciate any help.

Thanks.

Geoff



Submitted by Alan - IRA critic on Wed, 2020-05-20 02:35

  • This one is too complex to address due to the age of the loan and deemed distribution, and how the plan opted to deal with these details under the transition to the current Regs in 2002. See QA 22 in the attached IRS Reg to see how many variables are involved here. Generally, the client should not be double taxed on the plan balance that has already been taxed with prior 1099R reported deemed distributions. It is also not clear whether the plan should have been issuing annual 1099R forms, apparently for interest accruing after the deemed distribution.
  • https://www.law.cornell.edu/cfr/text/26/1.72(p)-1

Submitted by David Mertz on Wed, 2020-05-20 12:36

If a Form 1099-R reporting the accrued interest as a distribution was issued every year up to the present, apparently the plan did not apply the transition rule and the amount of the deemed distribution plus the accrued interest reported yearly on Form 1099-R now represents after-tax basis in the plan.  However, regardless of whether the plan applied the transition rule on January 1 of some year after 2001, upon distribution of the entire plan balance, on the resulting Form 1099-R the loan offset amount should be included in box 1 along with the rest of the balance in the plan, the accumulated after-tax basis should be in box 5 and the taxable amount (box 1 minus box 5, but not less than zero) should be in box 2a.

Submitted by Geoffrey Kasher on Wed, 2020-05-20 13:11

thanks

Add new comment

Log in or register to post comments