In December 1995, the IRS released long-anticipated guidance on participant loans. The guidance takes the form of proposed regulations under Sec. 72 (p).
The regulations clarify many points that had been assumed with respect to participant loans and provide additional guidance. Among the points covered and clarified by the proposed regulations:
* Participant loans issued in excess of the maximum amount permitted by Sec. 72 (p) (2) (a) are considered deemed distributions for purposes of Sec. 72(p), to the extent of the excess--e.g., a participant loan of $70,000 to a participant whose account balance exceeds $100,000 results in a $20,000 deemed distribution. The remainder is not a deemed distribution.
* A loan issued for an excessive initial time period (five years, in most cases) is considered a deemed distribution at the time the loan is made.
* A participant who defaults on a participant loan is considered to have a deemed distribution, generally at the time of default. However, the regulation contains a provision for...