Step 1 – Decide if a Default Occurred

Important. If a participant has more than one loan in default, you may complete one Loan Default Form for all loans.

According to the Internal Revenue Service (IRS), a loan is in default if:

  • A loan payment is not made by the end of the calendar quarter following the quarter in which payment was due, or
  • A loan is not paid in full by the date on which it was due to be paid in full.

Reports You Will Receive

The Program is responsible for acting on defaulted loans. However, you have responsibilities as well. You will receive a monthly Loan Report from the Program. The Report includes:

  • The names of all participants with outstanding loans in your firm’s plan, and
  • The last payment date for each loan.

You should use this Report to monitor the status of participant loan repayments and to make sure the information on the Report is correct. This Report can also assist you in ensuring that payments are up to date and that terminated participants are still making repayments as required.

Warnings to Participants

On the first business day of each quarter, the Program will issue a loan default warning to a participant if his or her loan is in danger of defaulting (i.e., January, April, July and October).

The Program will issue a second loan default warning on the first business day of the third month of each quarter (i.e., March, June, September and December).

Interest and IRS Reporting on Defaulted Loans

Interest continues to accrue on the outstanding amount of a defaulted loan. In addition, if the unpaid amount is not repaid within the applicable grace period allowed by the IRS, the Program will report to the IRS the outstanding amount of the loan and the outstanding interest as a taxable distribution, meaning it is subject to taxes and any applicable IRS penalties. After the loan is reported as a taxable event, it will continue as outstanding debt to the plan and continue to accrue interest. The taxable event does not extinguish the loan.

Step 2 – Complete and Send Loan Default Form to the Program

The Program will process a loan default when it determines a default has occurred (loan defaults occur on a quarterly basis). However, if you determine that a plan loan is in default, you may complete a Loan Default Form to have a loan defaulted at any time. Then, send the form to the Program using one of the methods provided under “Mail & E-mail” in the Forms, Tools and Resources section of the Guide.


Instructions for Completing Loan Default Form

A. You complete the employer information that relates to the plan. 
B. You complete the participant information. 
C. You complete the loan information: 
• Date of loan 
• Loan number
• Original loan amount
• Whether participant has terminated employment 
D. The authorized plan representative signs and dates the Form.

Step 3 – The Program’s Role

The Program will process Loan Default Form upon receipt of a properly completed and signed Form. The Program will notify the participant that the loan is considered a taxable distribution. In January of the following calendar year, the Program will mail the participant an IRS Form 1099-R reporting the taxable distribution. Note that the outstanding balance of the loan will continue to accrue interest and will appear on the participant’s quarterly statements until such time as it may be repaid in full.