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Employee Plans Compliance Unit (EPCU) - Current Projects – Terminated Plans with Outstanding Participant Loans

Why did I receive an EPCU Compliance Check Letter?

You received an EPCU compliance check letter because you’re a sponsor of a plan that terminated and you indicated on your final Form 5500-series return that your plan had investments in participant loans.

What is the EPCU attempting to determine?

The EPCU is attempting to determine if outstanding loan balances at the time all plan assets were distributed were treated properly for income tax purposes.

Unless the loans were issued from a designated Roth account or other after-tax employee contribution, participants must recognize their outstanding loan balances as taxable distributions at the time all trust assets are distributed. The amount of a participant’s outstanding loan balance that’s taxable income must be reported in box 2a on a recipient’s Form 1099-R.

Responses to a questionnaire will be used to determine:

  • identities of participants, beneficiaries and alternate payees who had unpaid loan balances at the time all the plan assets were distributed
  • amounts of the unpaid loan balances for each of these participants, beneficiaries and alternate payees
  • total distributions received by these participants, beneficiaries and alternate payees

The EPCU will analyze the responses and corresponding Forms 1099-R.

What actions do I need to take?

The person with primary responsibility for the day-to-day administration of your employee benefit programs should provide the requested information. You may also furnish any other documents or clarifying material that you believe will be helpful for us to review. You should be as complete and accurate as possible in your responses. If you need additional time, contact the person whose name is listed on the cover letter to request an extension prior to the due date of the response. You may send the response to the IRS by fax or mail. Failure to provide the information requested could result in further action or examination of your return.

If you have questions

Please email us and we’ll answer any questions you have about the project and how it relates to your situation. Please indicate “Terminated Plans with Outstanding Participant Loans Project” in the subject line of the message. You may also contact the person listed in the cover letter with questions.

Background

EPCU will mail the contact letter and request for information to a random sample of approximately 200 plan sponsors. If it is determined that outstanding loan balances were taxable distributions but were not reported as taxable on Forms 1099-R, the plan sponsor will be asked to file amended Forms 1099-R and advise the affected payees to amend their respective income tax returns. If the plan sponsor appears to be compliant, or if necessary corrections are made, we will issue a closing letter notifying the plan sponsor that the compliance contact has been resolved.

The information gathered from this project will result in a report issued by the Internal Revenue Service identifying areas where we need additional education, guidance, or outreach.

Additional resources

Form 1099-R and instructions

Page Last Reviewed or Updated: 09-Sep-2014