What action should be taken if participant loans are delinquent and the account administrator is unaware?

When participant loans become delinquent, particularly those that are over 120 days past due, they often need to be treated as taxable distributions. This is an important step in compliance with IRS regulations, which dictate that loans in default for a certain duration must be reported as taxable income to the participant.

The rationale behind this treatment is that if a loan is not repaid in a timely manner, the outstanding balance is effectively considered a distribution of funds, which alters the taxation dynamics for the participant. Treating it as a taxable distribution ensures that the required tax implications are triggered, thus maintaining adherence to federal regulations and safeguarding both the plan and administrator from potential penalties related to mismanagement of the loan program.

In contrast, simply doing nothing would ignore the financial obligation of the participant and could lead to further complications down the line. Notifying the Named Fiduciary is an important administrative step, but it does not directly address the immediate need to manage the consequences of the delinquency as specified by tax laws. Sending delinquency notices to beneficiaries is also not appropriate since the loans are obligations of the participant, not the beneficiaries. Hence, proper action aligns with the regulatory framework and preserves the integrity of the retirement plan.