By Pension and Benefits Editorial Staff
The IRS has issued proposed regulations relating to amendments made by the Tax Cuts and Jobs Act (TCJA, P.L. 115-97) that extend the rollover period for a qualified plan loan offset. The regulations are proposed to apply when finalized but can be relied upon until then. Written or electronic comments and requests for a public hearing must be received by October 5, 2020.
Plan loan offset amounts. A distribution of a plan loan offset amount occurs when the employee’s accrued benefit is reduced (offset) in order to repay an outstanding plan loan. This may occur when, for example, the terms governing a plan loan require that, in the event of an employee’s termination of employment or request for a distribution, the loan is to be repaid immediately or treated as in default. A plan loan offset may also occur when the loan is canceled, accelerated, or treated as if it is in default (for example, if the plan treats a loan as in default upon an employee’s termination of employment or within a specified period thereafter). A plan loan offset cannot occur prior to a distributable event.
TCJA amended Code Sec. 402(c)(3) to provide an extended rollover deadline for qualified plan loan offset (QPLO) amounts. Any portion of a QPLO amount (up to the entire QPLO amount) may be rolled over into an eligible retirement plan by the individual’s tax filing due date (including extensions) for the tax year in which the offset occurs. A QPLO amount is a plan loan offset amount treated as distributed from a qualified employer plan to an employee or beneficiary solely by reason of: (1) the termination of the qualified employer plan, or (2) the failure to meet the repayment terms of the loan from the plan because of the severance of the employee from employment.
The proposed regulations confirm that a QPLO is a type of plan loan offset. Thus, the IRS explains that most of the general rules relating to plan loan offset amounts apply to QPLO amounts. For example, the rule that a plan loan offset amount is an eligible rollover distribution applies to a QPLO amount. In addition, the rules in IRS Reg. §1.401(a)(31)-1, Q&A-16 (guidance concerning the offering of a direct rollover of a plan loan offset amount), and IRS Reg. §31.3405(c)-1, Q&A-11 (guidance concerning special withholding rules with respect to plan loan offset amounts), applicable to plan loan offset amounts in general, apply to QPLO amounts. The proposed regulations provide examples to illustrate the interaction of the special rules for QPLOs with the general rules for plan loan offsets.
Rollover of QPLO. The proposed regulations provide that a taxpayer (or spousal distributee) with an eligible rollover distribution that is a QPLO amount may roll over any portion of the distribution to an eligible retirement plan, including another qualified retirement plan (if that plan permits it) or an IRA, by the taxpayer’s deadline for filing income taxes for the year of the distribution, including extensions. In addition, the taxpayer may qualify for an extended period past his or her tax filing due date in which to complete a rollover even if the taxpayer does not request a filing extension.
Example. On June 1, 2020, taxpayer Andrea has an eligible rollover distribution of $10,000 that is a QPLO amount. She may be able to roll over the $10,000 amount as late as October 15, 2021. This automatic six-month extension applies if the taxpayer timely files her tax return by April 15, 2021 (the due date of her return), rolls over the QPLO amount within the six-month period ending on October 15, 2021, and amends her return by October 15, 2021, as necessary to reflect the rollover.
The proposed regulations define a QPLO amount as a plan loan offset amount that satisfies two requirements. First, the plan loan offset amount must be 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 from the plan because of the severance from employment of the employee. Second, the plan loan offset amount must relate to a plan loan that met the plan loan requirements immediately prior to the termination of the qualified employer plan or the severance from employment of the employee, as applicable.
The proposed regulations provide several special rules for purposes of determining whether a plan loan offset amount is a QPLO amount. First, an employee has a severance from employment when the employee ceases to be an employee of the employer maintaining the plan. Second, a plan loan offset amount is treated as distributed from a qualified employer plan to an employee or beneficiary solely by reason of the failure to meet the plan loan repayment terms because of severance from employment if the plan loan offset: (1) relates to a failure to meet the repayment terms of the plan loan, and (2) occurs within the period beginning on the date of the employee’s severance from employment and ending on the first anniversary of that date.
The IRS explains that whether a plan loan offset amount is a QPLO amount is relevant to plan administrators because those administrators are responsible for reporting whether a distribution is a plan loan offset amount or a QPLO amount on Form 1099-R (Distributions From Pensions, Annuities, Retirement or Profit-Sharing Plans, IRAs, Insurance Contracts, etc.) and furnishing that form to the taxpayer. The Instructions to the 2020 Form 1099-R provide that if an employee’s accrued benefit is offset to repay a loan (a plan loan offset amount), the administrator should report the distribution as an actual distribution and not use Code L (for deemed distributions) in box 7. For a QPLO amount, the instructions to the 2020 Form 1099-R provide that the administrator should enter Code M (for QPLO amounts) in box 7. The IRS anticipates that the proposed 12-month rule will assist plan administrators in identifying QPLO amounts by providing a bright-line rule for determining whether a plan loan offset amount following a severance from employment is a QPLO amount.
Source: 85 FR 51369.
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