403b loan

[Christopher Singley]

On Tue, Feb 11, 2014 at 3:10 PM, Mike or Penny Novack <
stepbystepfarm at mtdata.com> wrote:

>
>
>> OP said "loan" not "withdrawal", so I presume the plan administrator
>> agrees that the distributions qualify under the rules.  I repeat, there are
>> no tax consequences to qualifying 403(b) loans that are properly repaid.
>>  There are tax consequences to withdrawals.
>>
>>  Excuse me please, but the loan is always going to be a POTENTIAL
> withdrawal which is why it must be properly accounted for. You even
> included the proviso "that are properly repaid" but apparently do not
> recognize that as a future conditional event which may or may not take
> place. What happens if future events conspire that the loan cannot be
> repaid?
>
> Michael
>

If the loan can't be repaid, OP is going to get screwed by IRS.  He'll pay
taxes & penalties.  This can be fully accounted for by JEs booked in the
period when the screwing is administered - e.g. credit cash, debit tax
expense.  This is completely orthogonal to the accounting treatment
(especially on the balance sheet) during prior periods.  How would this
screwing be better accounted for by having previously maintained a
full-blown accounting of all the different tax buckets comprising his share
of the plan's assets and liabilities?  You're not going to need to
calculate your own penalties and interest; you'll get a nice letter from
IRS informing you of your obligations.  There's your backup, book your JE,
administer some moisturizer to relieve the chafing.  All done.

Look, defined contribution plans are less paternalistic than defined
benefit plans, but a major policy goal of sections 401 and 403 of the IRC
is that the burden for tax accounting should fall upon the plan
administrator, rather than requiring high school dropouts to maintain
scrupulous distinctions between pre- and post-tax contributions, deferred
wages and company profit-sharing contributions, basis and earnings.  While
these things are of importance to developers who write software for
financial institutions, there are very limited circumstances under which
plan participants actually need to gain an independent understanding of
these things, rather than relying upon information spoon-fed to them by the
plan administrator... and most of those circumstances are usually forbidden
by the plan trust documents, to make life easier for the sponsors &
administrators.

I personally would track the plan loan balance, because it matters to me...
most materially, because outstanding borrowings limit further borrowings
against plan assets, and sometimes having a tight reckoning of all my
sources of liquidity is an analysis I wish to perform.  But that certainly
isn't necessary - all that's really necessary is to track tax consequences,
and again, there really aren't any here.  Pretending the whole thing
doesn't exist (i.e. eliminating the asset/liability upon consolidation) is
certainly a valid accounting treatment, and it's exactly how the OP said he
thinks about the situation (i.e. shifting money from his left pocket to his
right pocket, which is the economic substance of this transaction).
"Natural" and "intuitive" are appealing features of any accounting system,
no?  Is there some important blocker to the KISS principle here?  Poor dude
just wants his books to balance in GnuCash, not do a deep dive on treasury
rules & regs.