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

The IRS has issued proposed regulations on the extended rollover period permitted for certain plan loan offset amounts. As background, if a participant’s account balance in a qualified retirement plan (such as a 401(k) plan) is reduced to repay a plan loan and the amount of that offset is considered an eligible rollover distribution, the offset amount can be rolled over into an eligible retirement plan. In general, the rollover must occur within 60 days. But for a “qualified plan loan offset” (QPLO), the rollover deadline 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 (see our Checkpoint article). A QPLO is an offset amount treated as distributed solely by reason of the plan’s termination or a failure to meet the loan’s repayment terms because of the participant’s severance from employment.

The proposed regulations affirm that QPLO amounts are subject to most of the general rules applicable to other plan loan offset rollovers, such as the special withholding rules and the rule waiving the obligation to offer direct rollovers. The proposed regulations contrast the rollover periods for QPLOs and other plan loan offsets, define essential terms, and offer a bright-line test for determining when a plan loan offset has been distributed by reason of severance from employment. Under that test, the offset would have to relate to a failure to meet the plan loan’s repayment terms and occur during the period beginning on the employee’s severance date and ending on the first anniversary of that date. Examples illustrate, among other things, the QPLO definition, the 12-month test for severances from employment, and the income tax withholding rules. The preamble clarifies that individuals who did not request an income tax filing extension nevertheless may have the full period to make a rollover (i.e., until the extended tax filing due date) if applicable requirements are met. The proposed regulations would become effective when published in final form, but may be relied on as of the date of publication in proposed form (August 20, 2020).

EBIA Comment: Since the QPLO rules have been in effect since 2018, it is helpful that the proposed regulations can be relied on immediately. And the 12-month test for determining whether an offset was due to a severance from employment should be useful to plan administrators because, as the preamble explains, QPLOs and other plan loan offsets are reported differently on Form 1099-R. 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.