4072 / What is the tax treatment when amounts borrowed under a tax sheltered annuity are found to constitute deemed distributions?

If a loan is treated as a deemed distribution, it is includable in gross income ( Q 4088) as if it were an actual distribution.¹ A loan treated as a deemed distribution may be subject to the 10 percent tax on early distributions imposed by IRC Section 72(t) ( Q 4074) as if it were an actual distribution.²

To the extent a loan, when made, is a deemed distribution or an account balance is reduced to repay a loan, apparently at the time a loan is made, the amount includable in income is subject to withholding. If a deemed distribution or a loan repayment by benefit offset results in income after the date the loan is made, withholding is required only if a transfer of cash or property excluding employer securities is made from the plan at the same time.³

Deemed distributions under IRC Section 72(p) are not eligible rollover distributions and are not subject to the mandatory 20 percent withholding applicable to certain eligible rollover distributions.⁴ Plan loan offset amounts can be eligible rollover distributions.⁵ For withholding rules relevant to plan loan offset amounts that are eligible rollover distributions, see Treasury Regulation Section 31.3405(c)-1, especially A-11.