A recent IRS Issue Snapshot (link below) affirms that a participant loan is a legally enforceable agreement and terms of the loan agreement must comply with Internal Revenue Code (IRC Section 72(p)(2) and Treasury Regulation Section 1.72(p)-1). The terms of the loan agreement must be explicit in writing or deliverable electronically.
A loan in default is considered to be a deemed distribution. But plans may offer a cure period during the quarter following the quarter in which the missed loan repayment occurred.
A deemed distribution can occur at the date the loan is made if:
If any of the above requirements are not met, the loan would be determined to be in default and will be considered a deemed distribution.
A deemed distribution is accompanied by immediate tax consequences to the participant.
The complete IRS Issue Snapshot is at www.irs.gov/retirement-plans/deemed-distributions-participant-loans.