IRS Finalizes Regulations on Extended Rollover Period for Qualified Plan Loan Offset Amounts

The IRS has released final regulations on the extended rollover period for qualified plan loan offset amounts (QPLOs). A QPLO occurs when a participant’s account balance in a qualified retirement plan (such as a 401(k) plan) is reduced to repay a plan loan, and that reduction occurs solely due to termination of the plan or the participant’s failure to meet the loan’s repayment terms because of severance from employment. For amounts distributed in taxable years beginning after 2017, Congress extended the rollover deadline for QPLO amounts to the due date (including extensions) of the participant’s tax return for the year in which the amount is treated as a distribution (see our Checkpoint article). Proposed regulations affirmed that QPLO amounts are subject to most of the general rules applicable to other plan loan offset rollovers, defined essential terms, and offered a bright-line test for determining when a plan loan offset has been distributed by reason of severance from employment (see our Checkpoint article). Under that test, a plan loan offset occurs solely due to severance if it relates to a failure to meet the plan loan’s repayment terms and occurs during the period beginning on the employee’s severance date and ending on the first anniversary of that date. A series of examples illustrated application of the QPLO definition, the bright-line test, and the relevant income tax withholding rules.

The final regulations are nearly identical to the IRS’s proposal with one significant exception. In response to concerns raised by the lone commenter, the effective date of the final regulations has been delayed. Taxpayers and Form 1099-R filers may choose to apply the final regulations to plan loan offset amounts treated as distributed on or after August 20, 2020 (the date on which the proposed regulations were published in the Federal Register). But compliance with the regulations is required only with respect to plan loan offsets treated as distributed on or after January 1, 2021. The delayed effective date means that the regulations will first have to be applied when completing Form 1099-Rs for 2021 that are required to be filed and furnished in 2022. As noted in the preamble, this should give administrators and recordkeepers sufficient time to adjust their systems and procedures to implement the bright line test for severance-related QPLOs.

EBIA Comment: The final regulations—and, in particular, the bright-line test—should eliminate some of the ambiguity surrounding the identification of QPLOs and their reporting and taxation. This is especially interesting to plan administrators and recordkeepers, who must report QPLOs differently from other plan loan offsets. Since 2018, the instructions for Form 1099-R have required filers to enter Code M in box 7 for QPLO amounts, but no code in that box for other plan loan offsets that are actual distributions. (Code L for “Loans treated as distributions” applies only to deemed distributions that are not actual distributions.) For more information, see EBIA’s 401(k) Plans manual at Sections VIII.H.2.b (“Rollover of Plan Loan”), XIV.D.3 (“Rollover of Loan Offsets After Severance or Plan Termination”), and XVI.F (“Consequences of Nonpayment: Default and Taxable Distributions”).

Contributing Editors: EBIA Staff.