IRS Issues Final Rules on Rollovers of Qualified Plan Loan Offsets

On December 7, 2020, the U.S. Internal Revenue Service (IRS) finalized rules that provide guidance on the extended rollover period for a qualified plan loan offset (QPLO).

Background

Generally, a plan participant will receive an “offset” distribution for a plan loan that is not repaid at the time a participant terminates employment or the plan terminates. This means that the outstanding plan loan amount is treated as a taxable plan distribution to the participant unless this amount is rolled over to another qualified plan or an individual retirement account (IRA) within a 60-day window. This requires the participant to come up with cash equal to the loan offset amount and roll this amount into an IRA or other qualified plan within 60 days to avoid being taxed on this offset amount, including the imposition of an early distribution penalty.

Extended Rollover Period

The Tax Cuts and Jobs Act of 2017 amended the Internal Revenue Code (Code) to provide for an extended rollover period for QPLOs. A QPLO that is an eligible rollover distribution is not required to be rolled over within the 60-day period described above. Instead, a participant may roll over such QPLO amount to an eligible retirement plan by the deadline (including extensions) for the participant’s income tax return for the year in which the offset is treated as distributed from the tax-qualified plan.

Definitions of Plan Loan Offset Amount, QPLO Amount, and Qualified Employer Plan Under the Final Rules

Under the final rules, a plan loan offset amount is defined as the amount by which the participant’s accrued benefit is reduced in order to repay the loan under the plan terms governing such loan. A QPLO amount, on the other hand, is defined as a plan loan offset amount that satisfies two extra conditions:

1. First, the plan loan offset amount must be treated as distributed from a qualified employer plan to a participant or beneficiary solely because (i) the participant fails to meet the loan repayment terms because he or she terminated employment, and the plan loan offset occurs within one year following the date the participant terminated employment from the employer maintaining the plan, or (ii) the employer terminated such plan.
2. Second, the plan loan being offset must have met the Code requirements for a loan not to be treated as a taxable distribution (such as the limits on plan loan amounts, requirement of level amortization, and the requirement that the plan loan term not exceed five years, except for certain mortgage loans) immediately prior to the participant’s termination of employment or the plan termination.

A qualified employer plan, for purposes of the QPLO amount definition, includes a tax-qualified plan described in Code section 401(a), a Code section 403(a) annuity plan, a plan under which amounts are contributed by employer for an annuity contract described in Code section 403(b), and a governmental plan.

Applicability Dates

The final rules apply to plan loan offset amounts, including QPLO amounts, on or after January 1, 2021. This means that the rules will first apply to 2021 Form 1099-Rs required to be filed with the IRS and provided to participants in 2022, although Form 1099-R filers may also apply the final rules to plan loan offset amounts treated as distributed on or after August 20, 2020.