IRS Issues Proposed Rollover Rules for Qualified Plan Loan Offset Amounts

The Aug. 18 proposed rules spell out procedures for rolling over qualified plan loan offset amounts under the Tax Cuts and Jobs Act (TCJA).

The rules set forth regulations relating to amendments made to Internal Revenue Code Section 402(c) by Section 13613 of the TCJA. That provision of the law provides an extended rollover period for a qualified plan loan offset. The IRS notes that the Setting Every Community Up for Retirement Enhancement Act of 2019 (SECURE Act) amended Code Section 401(a)(9) by changing the required beginning date applicable to Section 401(a) plans and other eligible retirement plans described in Section 402(c)(8). 

What the Proposed Regulations Do 

The proposed regulations:

• Add Treas. Reg. §1.402(c)-3 to take into account changes to the rollover rules made by Section 13613 of TCJA regarding qualified plan loan offset (QPLO) amounts. They provide examples to illustrate the interaction of the special rules for QPLOs with the general rules for plan loan offsets.
• Provide that a distribution of a plan loan offset amount which is an eligible rollover distribution and not a QPLO amount may be rolled over by the employee (or spousal distributee) to an eligible retirement plan (as defined in Code Section 402(c)(8)(B)) within the 60-day period set forth in Code Section 402(c)(3)(A).  
• Specify that a plan loan offset amount is the amount by which, under plan terms governing a plan loan, an employee’s accrued benefit is reduced (offset) in order to repay the loan (including the enforcement of the plan's security interest in the employee’s accrued benefit). A distribution of a plan loan offset amount is an actual distribution, not a deemed distribution under Section 72(p).  
• Provide several special rules for purposes of determining whether a plan loan offset amount is a QPLO amount: 

1. The proposed regulations provide that whether an employee has a severance from employment with the employer that maintains the qualified employer plan is determined in the same manner as under Treas. Reg.  §1.401(k)-1(d)(2).  
2. The proposed regulations provide that a plan loan offset amount is treated as distributed from a qualified employer plan to an employee or beneficiary only due to the failure to meet the plan loan repayment terms because of severance from employment if the plan loan offset: (a) relates to a failure to meet the repayment terms of the plan loan; and (b) occurs within the period beginning on the date of the employee’s severance from employment and ending on the first anniversary of that date.

Publication

The proposed rules are scheduled to be published in the Federal Register on Aug. 20, 2020, which will be available online at http://www.federalregister.gov/d/2020-16564.

Applicability Date

The IRS proposes that these regulations apply to plan loan offset amounts—including qualified plan loan offset amounts—treated as distributed on or after the date of publication of a Treasury decision adopting these rules as final regulations in the Federal Register.  

However, taxpayers may rely on these proposed regulations regarding plan loan offset amounts, including qualified plan loan offset amounts, treated as distributed on or after Aug. 20, 2020, the date the proposed regulations are to appear in the Federal Register, and before the date the regulations are published as final regulations in the Federal Register.

Public Comments

The IRS will accept comments in written or electronic form on the proposed regulations for 45 days after they are published in the Federal Register. Electronic submissions be made via the Federal eRulemaking Portal (indicate IRS and REG-116475-19). Hard copy submissions can be sent to CC:PA:LPD:PR (REG-116475-19), Room 5203, Internal Revenue Service, P.O. Box 7604, Ben Franklin Station, Washington D.C. 20044.  

Upcoming Guidance

The Treasury Department and IRS anticipate providing separate guidance on Section 114 of the SECURE Act, including amending Treas. Reg. §1.402(c)-2, to reflect changes made by the SECURE Act and to add new level designations for each paragraph in the questions and answers to satisfy Federal Register requirements. It is anticipated that the proposed Treas. Reg. §1.402(c)3 will be combined with Treas. Reg. §1.402(c)-2 in connection with that project (including replacing Q&-9 of §1.402(c)-2 with paragraph (a) of proposed Treas. Reg. §1.402(c)-3).