Large participant loans are a key examination issue. During an audit, IRS checks how plans handle loans, such as the time they allow for repayment, and what happens upon default. Agents ask for copies of signed loan agreements and promissory notes, as well as documentation to substantiate residential loans. Generally, plan loans are tax-free if the total doesn’t exceed the smaller of $50,000 or 50% of the account balance. Excess loans are treated as taxable distributions. Among the most common plan loan failures: loans over $50,000; Nonresidential loans in which repayment exceeds five years; and loan defaults, in which the participant fails to make the payment.
Source: The Kiplinger Tax Letter, June 17, 2016