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Wallstreet Esq.
Wallstreet Esq., Tax Attorney
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Experience:  10 years experience
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I took out loans from my own 403B annuity and did not repay

Customer Question

I took out loans from my own 403B annuity and did not repay them. I have long ago paid the penalty and taxes, but I am still being charged interest (collateral and finance charge) on the loans - which are now probably 8 or 9 years old. Is there a statute of limitations on these loans? I can't pay it back and these finance charges are eating away at the small positive balance that remains.
Submitted: 1 year ago.
Category: Tax
Expert:  Mark Taylor replied 1 year ago.

Hi, My name is Mark. I will be happy to help you with your questions.

Expert:  Mark Taylor replied 1 year ago.

So you paid the taxes associated with the unpaid loan. As well as a early distribution penalty?

Customer: replied 1 year ago.
I did - I also filed Ch 7 in 2008 - but I have been told that these loans can not be d/c in ch. 7 -
Expert:  Mark Taylor replied 1 year ago.

Did you receive a 1099-R?

Customer: replied 1 year ago.
I don't remember - but I do know that I paid the penalty and taxes
Expert:  Mark Taylor replied 1 year ago.

Usually when you have a unpaid loan, you will be issues a 1099-R (so the IRS would not that there was a retirement distribution) and the loan would be closed out.

Expert:  Mark Taylor replied 1 year ago.

Do you have a copy of the 2008 return showing the distribution?

Customer: replied 1 year ago.
I can check the web site - it was a long time ago - but I was audited and I paid the tax and penalty
Customer: replied 1 year ago.
Expert:  Mark Taylor replied 1 year ago.

Do you have a copy of the audit report?

Customer: replied 1 year ago.
no
Expert:  Mark Taylor replied 1 year ago.

You would need to go to the administrator of the 403b plan and demonstrate that the unpaid loan was already reported as a distribution.

Expert:  Mark Taylor replied 1 year ago.

The IRS would only have information for 6 years back. I believe the 403b plan administrator would have records of the 1099-R submitted for 2008.

Expert:  Mark Taylor replied 1 year ago.

For the IRS to make an adjustment on your return there had to be a 1099-R that was filed.

Customer: replied 1 year ago.
Ok that was really my question - when I spoke with them (Nationwide) some time ago they told me it didn't matter if I had paid the taxes and penalty the loan still had to be repaid
Expert:  Mark Taylor replied 1 year ago.

That makes no sense. If you repay the loan now then you paid taxes on a distribution that you never received.

Customer: replied 1 year ago.
I have felt like it is just a circle that I can't close so I have ignored it - all the while they are charging me finance interest - now almost $4000
Expert:  Mark Taylor replied 1 year ago.

Let's say that your outstanding loan was $10,000. You paid income taxes and a penalty on this unpaid balance. If you now repay this amount the loan would go way but you still paid the tax and the penalty.

Customer: replied 1 year ago.
that is what didn't make any sense to me.
Expert:  Mark Taylor replied 1 year ago.

I am looking through some information right now. Give me a few moments.

Expert:  Mark Taylor replied 1 year ago.

Here is information from the IRS' web site.

If the affected participant isn’t willing to make corrective payments or have the loan re-amortized then the plan or plan sponsor may simply report the unpaid loan amount as a deemed distribution and issue the form 1099-R in the year of correction.

So this is what I previously said. Let me look quickly look at the tax code.

Customer: replied 1 year ago.
thank you.
Expert:  Mark Taylor replied 1 year ago.

Internal Revenue Code 72(p)(A) states that the following about 403B loans.

If during any taxable year a participant or beneficiary receives (directly or indirectly) any amount as a loan from a qualified employer plan, such amount shall be treated as having been received by such individual as a distribution under such plan.

The exception would be if the loan is being repaid.

Customer: replied 1 year ago.
the required loan payments were not received by the end of the grace period, therefor the outstanding loan amout and accrued interest at the time of the default has been capitalized and will be or has been tax reported as a deemed distribution. However, the loan remains outstanding and will continue to accrue interest until the loan is repaid, the contract is surrendered, or an eligible distributable event occurs. If the outstanding laon and interest accrued after default is not repaid, it will be paid from your contract value at the time the contract is surrendered or an eligible distributable event occurs. Finance interest accrued after the date of default may be subject to income tax, when the contract is surrendered or a distributable event occurs.
Customer: replied 1 year ago.
this is the text that defines 'default' on my statement - I am not a CPA - but it sounds like I have to pay in every way possible. I just want to give the account away.
Expert:  Mark Taylor replied 1 year ago.

This was a qualified loan from your retirement account. Correct?

Expert:  Mark Taylor replied 1 year ago.

So when you repay the loan you are essentially paying yourself back.

Customer: replied 1 year ago.
with interest yes and then it sounds like I have to pay taxes on the interest that I repay to myself -
Expert:  Mark Taylor replied 1 year ago.

Your previous response mentions surrendering a contract. Is life insurance involved?

Expert:  Mark Taylor replied 1 year ago.

Is Nationwide charging fees? Do you still have a balance in the 403b account?

Customer: replied 1 year ago.
far $3809.01 in finance charges and my balance is $5,823 BEFORE the finance charge. With the interest on the principle ($8296) plus the original loan amounts it is a total of $17,010But really my question is are these types of loans NEVER subject to a statue of limitations?
Customer: replied 1 year ago.
I've filed ch 7, 8 years have gone by and Ive paid the taxes and penalty but STILL this is ticking away and going up
Expert:  Mark Taylor replied 1 year ago.

I completely understand your frustration. It is nonsense.

Customer: replied 1 year ago.
ok thank you . I considered taking money from my deferred compensation - paying the 'loan' and then putting the money back in the deferred comp account - but I am literally terrified of Nationwide and I am afraid they will find some other reason to keep my money.
Expert:  Mark Taylor replied 1 year ago.

I am still looking but everything that I am seeing shows that the loan should have been closed when the 1099-R was issued.

Expert:  Mark Taylor replied 1 year ago.

I have found that letters work well. Include a copy to your State's Attorney General.

Draft a letter stating the facts that you explained to me. That you had a loan from your 403-B plan. That the loan defaulted and a 1099-R was issued. The loan should have been closed out at this time. However, you are still receiving notice that the loan is still outstanding.

I had a lot of success dealing with large companies using this approach of CC the state's Attorney General.

Customer: replied 1 year ago.
Ok thank you I have sent an email to Nationwide asking for copies of any 1999 forms
Expert:  Mark Taylor replied 1 year ago.

You are looking for form 1099-R.