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

(Parker Tax Publishing December 2020)

The IRS issued final regulations on amendments made to Code Sec. 402(c) that provide an extended rollover period for a qualified plan loan offset. The final regulations, which adopted the proposed regulations with one modification relating to the applicability date, affect participants, beneficiaries, sponsors, and administrators of qualified employer plans. T.D. 9937.

Background

The Tax Cuts and Jobs Act of 2017 (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 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 T.D. 9937, the IRS adopted the QPLO proposed regulations with one important modification regarding the applicability date.

Proposed Regulations

In August, the IRS issued proposed regulations (REG-116475-19) setting forth rules in Reg. Sec. 1.402(c)-3 for QPLOs. The proposed regulations confirmed 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), which are applicable to plan loan offset amounts in general, apply to QPLO amounts. The proposed regulations provided examples to illustrate the interaction of the special rules for QPLOs with the general rules for plan loan offsets.

Observation: In the preamble to the proposed regulations, the IRS stated that it anticipated providing separate guidance on amending Reg. Sec. 1.402(c)-2 to reflect changes made in 2019 by the SECURE Act (relating to changes to Code Sec. 401(a)(9) to the required beginning date applicable to Code Sec. 401(a) plans and other eligible retirement plans described in Code Sec. 402(c)(8)) and to add new level designations for each paragraph in the questions and answers to satisfy Federal Register requirements. According to the IRS, Reg. Sec. 1.402(c)-3, which includes both the new QPLO rules and already existing plan loan offset rules in Q&A-9 of Reg. Sec. 1.402(c)-2, will be combined with Reg. Sec. 1.402(c)-2 in connection with that project (including replacing Q&A-9 of Reg. Sec. 1.402(c)-2 with Reg. Sec. 1.402(c)-3(a)).

The proposed regulations provided 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 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. The proposed regulations further provided 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 could 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.

The proposed regulations specified that a plan loan offset amount is the amount by which, under plan terms governing a plan loan, an employee's accrued benefit is reduced (offset) in order to repay the loan (including the enforcement of the plan's security interest in the employee's accrued benefit). The proposed regulations defined 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 such 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 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.

Several special rules were provided in the proposed regulations for purposes of determining whether a plan loan offset amount is a QPLO amount. First, the proposed regulations provided that 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. Sec. 1.401(k)-1(d)(2). Thus, an employee has a severance from employment when the employee ceases to be an employee of the employer maintaining the plan. Second, the proposed regulations provided that 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 (12-month rule).

According to the IRS, 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. In the QPLO proposed regulations, the IRS indicated that the proposed 12-month rule would 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 satisfies the first requirement to be a QPLO amount.

The proposed regulations proposed to apply the subsequent final regulations to plan loan offset amounts, including qualified plan loan offset amounts, treated as distributed on or after the date of publication of the final regulations. The preamble to the QPLO proposed regulations also stated that taxpayers (including a filer of a Form 1099-R) could rely on the proposed regulations with respect to plan loan offset amounts, including QPLO amounts, treated as distributed on or after August 20, 2020, and before the date the regulations are published as final regulations in the Federal Register.

Final Regulations

In T.D. 9937, the IRS finalized the proposed regulations with one modification regarding the applicability date. In order to provide additional time to implement Reg. Sec. 1.402(c)-3, the final regulations apply to plan loan offset amounts, including QPLO amounts, treated as distributed on or after January 1, 2021. Thus, for example, the rules in Reg. Sec. 1.402(c)-3 will first apply to 2021 Forms 1099-R required to be filed and furnished in 2022. 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 severance from employment of a plan participant and tracking the one-year anniversary of that date.

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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