IRS Offers Tips on Plan Offsets

The IRS has updated the information it provides concerning plan loan offsets. Specifically, it has added issue indicators and audit tips. 

The IRS on its website provides basic and background information concerning plan loan offsets. 

Plan loan offset defined. A plan loan offset, the IRS says, occurs when a participant’s account balance (or accrued benefit) is reduced to pay a defaulted loan. This may occur (1) when the terms governing a plan loan require that it be repaid immediately or (2) treated as being in default due to events such as an employee's termination. 

Distribution of a plan loan offset amount. The distribution of a plan loan offset amount can occur in a variety of circumstances. For example, a plan loan offset can occur when the terms governing a plan loan require that, if a participant terminates employment or asks for a distribution, the loan be repaid immediately or be treated as in default. Treasury regulations say that if a plan loan offset takes place, the amount of the account balance that is offset against the loan is an actual distribution for purposes of the Internal Revenue Code (IRC), and not a deemed distribution under IRC Section 72(p).

Rollovers. Amounts distributed from a qualified plan will be excluded from income they are transferred to an eligible retirement plan no later than the 60th day following the day the distribution is received; Treasury regulations state that, in general, plan loan offset distribution amounts are eligible rollover distributions.

Qualified plan loan offsets. A qualified plan loan offset (QPLO) is a type of plan loan offset that meets these requirements:

1. The plan loan offset amount is treated as distributed from a qualified employer plan to an employee or beneficiary only due to (1) the termination of the qualified employer plan, or (2) the failure to meet the repayment terms of the loan because of the severance from employment of the employee; and
2. The plan loan offset amount relates to a plan loan that met the requirements of Internal Revenue Code Section 72(p)(2) immediately before the termination of the qualified employer plan or the severance from employment of the employee.

Issue Indicators/Audit Tips 

The IRS has added information concerning issue indicators or audit tips: 

1. All plan loan offsets are actual distributions and, like other actual distributions, must be evaluated to ascertain whether they are made pursuant to permissible distributable events. Evaluate whether the in-service distribution is permissible under the terms of the plan and IRC. 
2. For QPLOs, evaluate whether the conditions for a QPLO have been satisfied and ascertain whether the participant was entitled to the extended rollover period accorded to QPLOs. 
3. Ascertain whether plan loan offsets, including QPLOs, are properly reported on Forms 1099-R.