What happens if a participant takes a loan from the Roth account and then defaults, requiring deemed distribution of the outstanding balance?
A deemed distribution of a participant loan is never treated as a qualified distribution even if it occurs after the participant has satisfied the five-year period and attained age 59½, died or become disabled. Therefore, the portion of the deemed distribution attributable to Roth is subject to income tax. To avoid confusion in this area, the loan policy can be written to restrict participant loans to non-Roth accounts.
