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

(Parker Tax Publishing August 2020)

The IRS issued proposed regulations relating to amendments made to Code Sec. 402(c) which provides an extended rollover period for a qualified plan loan offset (QPLO). The proposed regulations confirm that a QPLO is a type of plan loan offset and, thus, most of the general rules relating to plan loan offset amounts apply to QPLO amounts. REG-116475-19.

Background

The Tax Cuts and Jobs Act of 2017 (TCJA) amended Code Sec. 402(c) to extend the period during which a plan loan offset (QPLO) amount may be contributed to an eligible retirement plan as a rollover contribution to 60 days after the date of the offset, if the plan loan is a qualified plan loan offset. 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 defined in Code Sec. 402(c)(3)(C)(ii) as a plan loan offset amount that is 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 such plan because of the severance from employment of the employee. A loan offset amount is the amount by which an employee's account balance under the plan is reduced to repay a loan from the plan.

Code Sec. 402(c)(3)(C)(iv) provides that the extended rollover period does not apply to any plan loan offset amount unless such plan loan offset amount relates to a participant loan that is not treated as a distribution because it meets the exceptions to distribution treatment in Code Sec. 72(p)(2).

In REG-116475-19, the IRS issued Prop. Reg. Sec. 1.402(c)-3 to take into account changes to the rollover rules made by the TCJA with respect to QPLO amounts. The proposed regulations confirm that a QPLO is a type of plan loan offset and, thus, 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 Reg. Sec. 1.401(a)(31)-1, Q&A-16 (guidance concerning the offering of a direct rollover of a plan loan offset amount), and Reg. Sec. 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 Period for Plan Loan Offset Amounts, Including QPLO Amounts

Consistent with Reg. Sec. 1.402(c)-2, Q&A-9, the proposed regulations provide that a distribution of a plan loan offset amount that is an eligible rollover distribution and not a QPLO amount may be rolled over by the employee (or spousal distributee) to an eligible retirement plan (as defined in Code Sec. 402(c)(8)(B)) within the 60-day period set forth in Code Sec. 402(c)(3)(A). While a plan loan offset generally is subject to this 60-day rollover period, there are special rules for the waiver of the 60-day rollover deadline.

Consistent with Code Sec. 402(c)(3)(C), as amended by the TCJA, the proposed regulations provide that a distribution of a plan loan offset amount that is an eligible rollover distribution and a QPLO amount may be rolled over by the employee (or spousal distributee) to an eligible retirement plan through the period ending on the individual's tax filing due date (including extensions) for the tax year in which the offset is treated as distributed from a qualified employer plan. Thus, a taxpayer 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) or an IRA, by the taxpayer's deadline for filing income taxes for the year of the distribution, including extensions.

If a taxpayer to whom a QPLO amount is distributed satisfies the conditions in Reg. Sec. 301.9100-2(b), the taxpayer will have an extended period past his or her tax filing due date in which to complete a rollover of the QPLO amount, even if the taxpayer does not request an extension to file his or her income tax return but instead files the return by the unextended tax filing due date.

Observation: Section 114 of Division O of the Further Consolidated Appropriations Act of 2020, titled ''Setting Every Community Up for Retirement Enhancement Act of 2019'' (SECURE Act), amended Code Sec. 401(a)(9) by changing the required beginning date applicable to Code Sec. 401(a) plans and other eligible retirement plans described in Code Sec. 402(c)(8). The IRS said that it anticipates providing separate guidance on Section 114 of the SECURE Act, including amending Reg. Sec. 1.402(c)-2 to reflect changes made by the SECURE Act and to add new level designations for each paragraph in the questions and answers to satisfy Federal Register requirements The IRS anticipates that the proposed Reg. Section 1.402(c)-3 will be combined with Prop. Reg. Sec. 1.402(c)-2 in connection with that project (including replacing Q&-9 of Reg. Sec. 1.402(c)-2 with paragraph (a) of proposed Reg. Section 1.402(c)-3).

For a discussion of the rules regarding rollovers of distributions from qualified plans, see Parker Tax ¶131,550.

Disclaimer: This publication does not, and is not intended to, provide legal, tax or accounting advice, and readers should consult their tax advisors concerning the application of tax laws to their particular situations. This analysis is not tax advice and is not intended or written to be used, and cannot be used, for purposes of avoiding tax penalties that may be imposed on any taxpayer. The information contained herein is general in nature and based on authorities that are subject to change. Parker Tax Publishing guarantees neither the accuracy nor completeness of any information and is not responsible for any errors or omissions, or for results obtained by others as a result of reliance upon such information. Parker Tax Publishing assumes no obligation to inform the reader of any changes in tax laws or other factors that could affect information contained herein.

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