IRS Offers New Guidance for Qualified Plan Loan Offsets

Earlier this week the IRS issued proposed regulations regarding an extension of the rollover period for certain plan loan offset amounts.  The proposed rules implement portions of the Tax Cuts and Jobs Act (“TCJA”), which provides for an extended rollover period for a Qualified Plan Loan Offset (“QPLO”), which is a type of plan loan offset.  Even though the rules are proposed, they can be relied on immediately, and it is important to know what is in them.

As background, if the retirement account of a participant is used to repay a plan loan, the amount of the plan account used to repay the loan, otherwise known as the offset, is treated as an eligible rollover distribution. In such a case, the offset amount can be rolled over into an eligible retirement plan within 60 days. This is because a distribution of a plan loan offset amount is an actual distribution, not a deemed distribution under IRC Section 72(p).

For a QPLO, the normal rollover deadline of 60 days is extended to the due date (including extensions) of the participant’s tax return for the year in which the amount is treated as a distribution. The employee can also receive an automatic six-month extension if they file their tax returns by April 15, 2021 (the normal due date), roll over the QPLO amount within the six-months (no later than October 15, 2021), and then amend their return by October 15, 2021, to reflect the rollover.

A QPLO is defined as a plan loan offset amount distributed or treated as distributed from a plan to an employee or beneficiary solely because: (a) the employer terminates the plan, or (b) the employee does not pay back the loan because they had a severance from employment and the offset occurs within one year of the date the employee terminated employment.  The unpaid balance of the loan equals the plan loan offset amount.

In all cases, the loan must meet the normal loan requirements and is subject to all plan loan regulations such as loan limitation, level amortization, and other requirements set by the Tax Code immediately prior to the termination of the plan or the employee’s termination of employment. Additionally, the loan must not be in default at the time of the plan termination or at termination of employment.

If you have any questions about QPLOs, plan loans, or other benefits issues, please contact any of Graydon’s employee benefits team.