Treasury Decision 9937– Rollover Rules for Qualified Plan Loan Offset Amounts
The IRS has released final regs on the rollover period for a qualified plan loan offset amount.
Background.
An eligible rollover distribution from a qualified plan generally must be rolled over within 60 days after receipt to be excluded from income, under the Code Sec. 402(c)(1) tax-free rollover rule.
Except as specifically provided in Reg §1.402(c)-2, Q&A 4(b), an eligible rollover distribution generally is any amount distributed to an employee (or spousal distributee) from a qualified plan. (Reg §1.402(c)-2, Q&A 3)
A “plan loan offset amount distribution” (defined below) is an eligible rollover distribution if it satisfies Reg §1.402(c)-2, Q&A 3. Thus, an amount not exceeding the plan loan offset amount may be rolled over by an employee (or spousal distributee) to an eligible retirement plan within the 60-day period. (Reg §1.402(c)-2, Q&A 9(a))
For purposes of Code Sec. 402(c), a plan loan offset amount distribution occurs when, under the plan terms governing a plan loan, the participant’s accrued benefit is reduced (offset) in order to repay a loan (including the enforcement of the plan’s security interest in a participant’s accrued benefit). (Reg. §1.402(c)-2, Q&A 9(b))
Section 13613 of the Tax Cut and Jobs Act (TCJA, PL 115-97) amended Code Sec. 402(c)(3) to provide an extended rollover deadline for qualified plan loan offset (QPLO) amounts (defined below). 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. (Preamble to Prop Reg REG-116475-19)
In addition, taxpayers who filed their 2019 tax returns by July 15, 2020 (the postponed tax return deadline granted in Notice 2020-18, 2020-15 IRB 592, due to COVID-19), had until October 15, 2020, to roll over all or any portion of a QPLO amount to an eligible retirement plan. (IRS website: Filing and Payment Deadlines Questions and Answers)
A QPLO amount means a “plan loan offset amount” which is treated as distributed from a qualified employer plan to a participant or beneficiary solely by reason of: (a) the termination of the qualified employer plan; or (b) the failure to meet the repayment terms of the loan from the plan because of the participant’s “severance from employment.” (Code Sec. 402(c)(3)(C)(ii))
For QPLO purposes, the Code defines a “plan loan offset amount” as the amount by which the participant’s accrued benefit under the plan is reduced in order to repay a loan from the plan. (Code Sec. 402(c)(3)(C)(iii))
The Code does not define “severance from employment” for QPLO purposes. But it does define it for other retirement plan purposes.
Reg. §1.401(k)-1(d) says that an employee has a severance from employment when the employee ceases to be an employee of the employer maintaining the plan. An employee does not have a severance from employment if, in connection with a change of employment, the employee’s new employer maintains such plan with respect to the employee. For example, a new employer maintains a plan with respect to an employee by continuing or assuming sponsorship of the plan or by accepting a transfer of plan assets and liabilities (within the meaning of Code Sec. 414(l)) with respect to the employee.
In addition, for QPLO purposes, the plan loan offset amount must meet the plan loan limitation requirements of Code Sec. 72(p)(2). (Code Sec. 402(c)(3)(C)(iv)) A “qualified employer plan” is defined under Code Sec. 72(p)(4), which describes the types of plans subject to the plan loan distribution rules. (Code Sec. 402(c)(3)(C)(v))
Proposed regs.
On August 20, 2020, the IRS published proposed new rules (Proposed Reg §1.402(c)-3) for qualified plan loan offsets (the proposed regs).
The proposed regs confirmed that a QPLO would be a type of plan loan offset as defined under Reg. §1.402(c)-2, Q&A 9(b). (Prop Reg §1.402(c)-3(a)(2)(i))
Further, the proposed regs adopted the definition of “plan loan offset” as it appears in Reg. §1.402(c)-2, Q&A 9(b). (Prop Reg §1.402(c)-3(a)(2)(iii)(A))
Accordingly, the prop regs provided that most of the general rules relating to plan loan offset amounts would apply to QPLO amounts. For example, the rule that a plan loan offset amount is an eligible rollover distribution would apply to a QPLO amount. (Preamble to Prop Reg REG-116475-19)
In addition, under the proposed regs, the rules in
- Reg. §1.401(a)(31)-1, Q&A 16 (guidance concerning the offering of a direct rollover of a plan loan offset amount), and
- Reg. §31.3405(c)-1, Q&A 11 (guidance concerning special withholding rules with respect to plan loan offset amounts),
also applied to QPLO amounts. (Preamble to Prop Reg REG-116475-19)
The proposed regs clarified that a plan loan offset amount would be a QPLO amount only if the plan loan offset amount relates to a plan loan that met the requirements of Code Sec. 72(p)(2) immediately prior to the termination of the qualified employer plan or the severance from employment of the employee, as applicable. (Prop Reg §1.402(c)-3(a)(2)(iii)(B)(2))
The proposed regs adopted the Code Sec. 402(c)(3)(C)(v) definition of qualified employer plan. (Prop Reg §1.402(c)-3(a)(2)(iii)(C))
The proposed regs also provided that, for QPLO purposes, whether an employee has a severance from employment with the employer that maintains the qualified employer plan is determined in the same manner as under Reg §1.401(k)-1(d)(2). (Prop Reg §1.402(c)-3(a)(2)(iv)(A))
In addition, under the proposed regs, 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:
- Relates to a failure to meet the repayment terms of the plan loan, and
- Occurs within the period beginning on the date of the employee’s severance from employment and ending on the first anniversary of that date (“12-month rule”). (Prop Reg §1.402(c)-3(a)(2)(iv)(B))
With regard to Prop Reg §1.402(c)-3(a)(2)(iv)(B), 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 proposed regs provide a bright-line rule (the “12-month rule”) for determining whether a plan loan offset amount following a severance from employment is a QPLO amount. In the Preamble to the proposed regs, the IRS said that the 12-month rule would assist plan administrators in identifying QPLO amounts.
Applicability date of the proposed regs. The proposed regs were proposed to apply to plan loan offset amounts, including QPLO amounts, treated as distributed on or after the adoption of these rules as final regs in the Federal Register. (Prop Reg §1.402(c)-3(b)(2)) However, taxpayers were allowed to rely on the proposed regs with respect to plan loan offset amounts, including QPLO amounts, treated as distributed on or after August 20, 2020, and before the date the regs are published as final regs in the Federal Register. (Preamble to Prop Reg REG-116475-19) See Proposed reliance regs on extended rollover period for a qualified plan loan offset amount (08/19/2020).
Final regs.
The final regs adopt the QPLO proposed regs with one important modification relating to the applicability date.
The final regs will apply to plan loan offset amounts, including qualified plan loan offset amounts, treated as distributed on or after January 1, 2021. Thus, for example, the rules in Reg §1.402(c)-3 will first apply to 2021 Form 1099-Rs required to be filed and furnished in 2022 (more than one year after the publication date of the final regs). (Reg §1.402(c)-3(b)(2))
According to the IRS, this delayed applicability date will give plan administrators and recordkeepers additional time to program systems and otherwise establish procedures for obtaining the exact date of a plan participant’s severance from employment and tracking the one-year anniversary of that date.
The final regs also revise the applicability date to provide that taxpayers (including a filer of a Form 1099-R) may apply these regs with respect to plan loan offset amounts, including qualified plan loan offset amounts, treated as distributed on or after August 20, 2020, the publication date of the QPLO proposed regs. (Preamble to TD 9937)
Regs are an advance copy.
The document containing these final regs is an advance release document that has been submitted to the Office of the Federal Register (OFR) and is pending publication. The version of the final regs contained in this document may vary from the published document if editorial changes are made during OFR review. The final regs published in the Federal Register will be the official regs.
To continue your research on qualified plan loan offsets, see FTC 2d/FIN ¶H-11452.5.
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