Compliance October 25, 2021

Deemed Distributions Can Be Triggered by More Than Just Loan Nonpayment

The IRS reminds retirement plan sponsors of rules that, if broken, can result in loan amounts being deemed distributions.

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An IRS Issue Snapshot reminds plan sponsors about failures that will cause a participant loan, or a portion of the loan, from a qualified retirement plan to become a deemed distribution for tax purposes.

Plan sponsors might be most familiar with the failure that occurs when a participant loan goes into default if payments are not made. But the IRS says failures also could occur when participant loans exceed the maximum dollar amount, have payment schedules that do not meet the time or payment requirements, or are not legally enforceable agreements.

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According to the Issue Snapshot, a participant loan must be a legally enforceable agreement, which may include more than one document, and the terms of the agreement must demonstrate compliance with the requirements of Internal Revenue Code (IRC) Section 72(p)(2) and Treasury Regulation Section 1.72(p)-1. These require the agreement to specify the amount and date of the loan as well as the repayment schedule. The IRS says the agreement does not have to be signed if it is enforceable under applicable law without being signed; however, it must be set forth in a written paper document or in a document that is delivered through an electronic medium under an electronic system.

IRC Section 72(p)(2)(A) provides that a participant loan, when added to the outstanding balance of all other loans to the participant from all the employer’s plans, may not exceed the lesser of:

  • $50,000, reduced by the excess (if any) of—
    • the highest outstanding balance of loans from the plan during the one-year period ending on the day before the date on which such loan was made, over
    • the outstanding balance of loans from the plan on the date on which such loan was made, or
  • The greater of either 50% of the participant’s vested accrued benefit or $10,000.

IRC Section 72(p)(2)(B) states that the repayment period of the plan loan must be limited to five years unless the loan is used to purchase a dwelling unit which will, within a reasonable amount of time, be used as the principal residence of the participant. In addition, IRC Section 72(p)(2)(C) requires substantially level amortization over the term of the loan, with payments occurring not less frequently than quarterly. The Issue Snapshot discusses the few exceptions to this requirement.

If any of these requirements is not met, a deemed distribution will occur.

According to the Issue Snapshot, if the loan terms violate the repayment term requirement or the level amortization requirement or if there is no legally enforceable agreement, the entire loan is considered a deemed distribution on the date the loan is made.

If the amount loaned exceeds the limitations of IRC Section 72(p)(2)(A), then the deemed distribution is the amount by which the loan exceeds the limitations. If the participant failed to make any installment payment when due in accordance with the terms of the loan, then the deemed distribution is the amount of the outstanding balance of the loan, plus accrued interest.

The IRS reminds plan sponsors that the plan may provide a cure period for participants to catch up on missed loan payments. It also reminds plan sponsors that the Coronavirus Aid, Relief and Economic Security (CARES) Act of 2020 increased the allowable loan amount for loans made to a qualified individual on or after March 27, 2020, and before September 23, 2020. The bill also provided for an extension of payment terms.

The IRS Issue Snapshot is at https://www.irs.gov/retirement-plans/deemed-distributions-participant-loans.

Reader Responses October 25, 2021

SURVEY SAYS: Does Your Employer Track Remote Employee Activity?

NewsDash readers share their opinion of employers using software to track remote employee activity and productivity.

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A survey has found 60% of companies with employees who work remotely are using monitoring software to track employee activity and productivity. They are doing so by using software that monitors web browsing and application use, captures random screenshots, blocks content and applications and/or logs keystrokes.

Last week, I asked NewsDash reader, “Is your employer monitoring remote employee activity and productivity?” I also asked “How do you feel about this practice?”

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Nearly half (47%) of responding readers work in a plan sponsor role, 42% are/work for recordkeepers/TPAs/investment consultants, and 11% are advisers/consultants.

More than half of respondents (53%) said they don’t know if their employer is monitoring remote employee activity and productivity, 37% indicated their employer is not doing so, and 10% said their employer is.

Only 5% said they agree 100% with the practice of employers monitoring remote employee activity and productivity, and the same percentage said they were unsure about it. Eleven percent disagree with the practice 100%, while 21% agree with an employer’s right to use any monitoring, but said it makes them uncomfortable. Fifty-eight percent agreed with the statement, “I think blocking certain content and applications is fine, but other monitoring is intrusive.”

While there were comments on both sides of the issue, all of the few commenters made good points. For example, any monitoring should be disclosed to employees; remote employees may be working more flexible hours for various reasons, so time offline isn’t always an indication of not being productive; and there’s nothing wrong with taking time to regroup, recharge or release. Editor’s Choice goes to the reader who said: “If you don’t trust your employees, maybe you shouldn’t employ them.”

A big thank you to all who completed the survey.

Verbatim

“All responses are anonymous”, unless your employer is monitoring… Even at work there should be the ability to have private conversations, anything else is a morally wrong invasion of privacy.

If you don’t trust your employees, maybe you shouldn’t employ them.

As long as it is fully disclosed to the employees, and the monitoring software is in place for everyone regardless of where they work (office based as well as remote), I fully support the employers right to monitor.

If they monitor your work and productivity while you are physically at work, I’m not sure how this is any different, you probably just can’t hide extra window computer tab as well anymore. I fully believe in full trust from my employer, but I do understand that some people take advantage of that “blind” trust sometimes…

If employers are doing this it should definitely be disclosed to employees.

Some employers monitor activity and productivity for employees who are working in a local office, so I don’t feel to do similar monitoring for remote employees should be an issue. Employers should be aware that remote employees may be working during random, flexible periods during a day as long as they are available during mutually agreed to core hours if that is a requirement. So, no activity for a period of time during the day should not be interpreted as unproductive for a remote employee.

Since I am salaried, I don’t have set hours, I just have to get the work done. But I will say I am signed in for at least 10 hours a day and work those hours, or the work won’t get done. Some areas of the company that have employees who are not salaried monitor their employees’ computer time.

It makes me wonder how much employees were being monitored when they were in the office.

Make your managers do their job! And trust that your employees are doing theirs. If an employee isn’t getting their work done, you have a problem – address it. Suck it up buttercup and treat humans like humans. Don’t take the coward’s way out.

It is acceptable to monitor and block “certain content and certain activities,”but it displays lack of trust to monitor how much time is spent in different applications or online. It is uncomfortable and feels as though taking a moment to regroup after a difficult conversation or a lengthy task or a creative block is unacceptable. There is not any monitoring in the middle of the night when I toss and turn until I find a brilliant solution to solve a challenge. If only they knew how many times I wake up and write myself a note to look into something the next morning.

Unfortunately, there will be people who abuse the ability to work from home so monitoring may be a necessary evil.

 

NOTE: Responses reflect the opinions of individual readers and not necessarily the stance of Institutional Shareholder Services (ISS) or its affiliates.

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