3967 / Are deemed distributions treated as outstanding loans?

Yes. For purposes of the dollar limitation on loans under IRC Section 72(p) ( Q 3954), a loan treated as a deemed distribution is considered an outstanding loan until it is repaid.¹

Regulations place two conditions on loans made while a deemed distribution loan remains unpaid.

First, the subsequent loan must satisfy the rules for qualifying plan loans.

Second, the loan must either be repayable under a payroll withholding arrangement enforceable under applicable law or the participant must provide the plan with adequate collateral for the loan in addition to the participant’s accrued benefit.

The payroll withholding arrangement may be revocable, but should the participant revoke it, the outstanding loan balance is treated as a deemed distribution. If, for any reason, the additional collateral ceases to be in force before the subsequent loan is repaid, the outstanding balance of the subsequent loan is treated as a deemed distribution.

If these conditions are not satisfied, the entire subsequent loan is treated as a deemed distribution under IRC Section 72(p).²