IRS Proposed Regulations Address Rollovers of Qualified Plan Loan Offset Amounts

Practical Law Legal Update w-027-0632 (Approx. 4 pages)

IRS Proposed Regulations Address Rollovers of Qualified Plan Loan Offset Amounts

by Practical Law Employee Benefits & Executive Compensation

Qualified Plan Loan Offset Amounts Under the TCJA

In 2017, the TCJA amended Code Section 402(c) (26 U.S.C. § 402(c)) to add a new type of plan loan offset called a "qualified plan loan offset amount" which is a loan offset that is deemed distributed from a plan because of the termination of the plan or the participant's failure to repay the loan because of a separation from service. While other types of plan loan offsets must generally be rolled over to an eligible retirement plan within 60 days to avoid owing immediate income tax on the loan balance (see Practice Note, Qualified Retirement Plan Loans: Tax Treatment of Offset), qualified plan loan offset amounts may be rolled over to an eligible retirement plan by the due date (including extensions) for the federal income tax return for the year in which the offset occurs.

Proposed Regulations

The proposed regulations would amend the Treasury regulations to reflect the changes made by the TCJA. In particular, the regulations would add Section 1.402(c)-3, which:

Defines "qualified plan loan offset amount" as an amount that:
- is treated as distributed from a plan solely because of the plan's termination or the participant's failure to repay the loan because of a severance from employment; and
- relates to a plan loan that met the requirements in Code Section 72(p)(2) (26 U.S.C. § 72(p)(2)) before the plan or employee was terminated (see Practice Note, Qualified Retirement Plan Loans: Requirements of Code Section 72(p)).
Defines "qualified employer plan" consistent with Code Section 72(p)(4) (26 U.S.C. § 72(p)(4)).
Defines "severance from employment" consistent with Treasury Regulation Section 1.401(k)-1(d)(2) (26 C.F.R. § 1.401(k)-1(d)(2)).
Provides that an offset is treated as being caused by a severance from employment if the offset:
- relates to a failure to satisfy the loan's repayment terms; and
- occurs within one year of the participant's severance from employment.
Provides that a qualified plan loan offset amount may be rolled over to an eligible retirement plan by the due date (including extensions) for the federal income tax return for the year in which the offset occurs.
Includes several examples involving qualified plan loan offset amounts.

The changes would apply to plan loan offset amounts that are treated as distributed on or after the date the final regulations are published in the Federal Register. The IRS provides, however, that taxpayers may rely on the proposed regulations after they are published in the Federal Register.

Comments on the proposed regulations are due 45 days after publication in the Federal Register.

Practical Implications

Retirement plan sponsors, administrators, and other service providers should familiarize themselves with the proposed regulations and watch for additional guidance from the IRS. The preamble of the proposed regulations indicates that the IRS expects to issue separate guidance concerning changes made by the Setting Every Community Up for Retirement Enhancement Act (SECURE Act) to the required beginning date (RBD) for certain distributions (see Legal Update, Government Funding Legislation Includes the SECURE Act, Which Changes Retirement Plan Requirements: Plan Distributions), and that proposed Section 1.402(c)-3 will likely be combined with Section 1.402(c)-2 as part of that guidance.

IRS Proposed Regulations Address Rollovers of Qualified Plan Loan Offset Amounts | Practical Law