The Internal Revenue Service released final regulations Dec. 7 relating to amendments made by the Tax Cuts and Jobs Act (TCJA) providing an extended rollover period for a qualified plan loan offset (QPLO).
Section 13613 of TCJA amended Internal Revenue Code Section 402(c)(3) to provide an extended rollover deadline for QPLO amounts, such that any portion of a QPLO amount may be rolled over to an eligible retirement plan by the individual’s tax filing due date (including extensions) for the tax year in which the offset occurs.
Before the TCJA, a participant receiving an “offset” distribution for a loan that is not repaid at the time a participant terminates employment would have had 60 days to come up with the loan offset amount and roll those monies into an IRA or qualified plan to avoid being taxed on the amount and potentially subject to an early distribution penalty.
The final regulations largely adopt the proposed regulations released in August 2020, except for a change to the effective date. Instead of applying to plan loan offset amounts treated as distributed on or after the date of publication in the Federal Register, the revised applicability date will apply to plan loan offset amounts—including QPLO amounts—treated as distributed on or after Jan. 1, 2021. Thus, for example, the rules in Treas. Reg. §1.402(c)-3 will first apply to 2021 Form 1099-Rs required to be filed and furnished in 2022 (more than one year after the date of publication of the final regulations).
The IRS notes that this delayed applicability date will give plan administrators and recordkeepers additional time to program systems and otherwise establish procedures for obtaining the exact date of severance from employment of a plan participant and tracking the one-year anniversary of that date.
However, taxpayers (including a filer of a Form 1099-R) may apply these regulations with respect to plan loan offset amounts, including QPLO amounts, treated as distributed on or after Aug. 20, 2020, which is the publication date of the proposed regulations.
Rollover Deadlines
For purposes of a plan loan offset amount that is not a QPLO, a distribution of a plan loan offset amount that is an eligible rollover distribution may be rolled over by the employee (or spousal distributee) to an eligible retirement plan within the 60-day period set forth in Section 402(c)(3)(A).
For a QPLO amount, a distribution of a plan loan offset amount that is an eligible rollover distribution may be rolled over by the employee (or spousal distributee) to an eligible retirement plan within the individual’s tax filing due date—including extensions—for the tax year in which the offset is treated as distributed from a qualified employer plan.
The final regulations include seven examples illustrating the rules and various interactions with respect to plan loan offset amounts, including QPLO amounts.
Background
In general, a plan loan offset amount is the amount by which, under the 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 an employee’s accrued benefit.
The IRS notes that a distribution of a plan loan offset amount can occur in a variety of circumstances; for example, when the terms governing a plan loan require that in the event of the employee’s termination of employment or request for a distribution, the loan be repaid immediately or treated as in default.
A distribution of a plan loan offset amount also occurs when the loan is cancelled, accelerated or treated as if it were in default—for example, when the plan treats a loan as in default upon an employee’s termination of employment or within a specified period thereafter. Furthermore, a distribution of a plan loan offset amount is an actual distribution, not a deemed distribution under Internal Revenue Code Section 72(p).
For purposes of Section 402(c), a QPLO amount is a plan loan offset amount that satisfies the following requirements:
- the plan loan offset amount is treated as distributed from a qualified employer plan to an employee or beneficiary solely by reason of the termination of the qualified employer plan, or the failure to meet the repayment terms of the loan because of the severance from employment of the employee; and
- the plan loan offset amount relates to a plan loan that met the requirements of Section 72(p)(2) immediately before the termination of the qualified employer plan or the severance from employment of the employee, as applicable.
The Treasury Department and IRS anticipate providing separate guidance with respect to the SECURE Act changes to Section 401(a)(9) regarding the increase in age for required minimum distributions. Treasury anticipates that Treas. Reg. §1.402(c)-3, which includes both the new QPLO rules and already existing plan loan offset rules in Q&A-9 of Treas. Reg. §1.402(c)-2, will be combined with Treas Reg. §1.402(c)-2 in connection with that project.
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