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IRS Final Regulations Address Rollovers of Qualified Plan Loan Offset Amounts
Practical Law Legal Update w-029-0761 (Approx. 4 pages)
IRS Final Regulations Address Rollovers of Qualified Plan Loan Offset Amounts
by Practical Law Employee Benefits & Executive Compensation
| Published on 06 Jan 2021 • USA (National/Federal) |
The Internal Revenue Service (IRS) has issued final regulations that reflect changes the Tax Cuts and Jobs Act (TCJA) made to Internal Revenue Code Section 402(c) regarding rollovers of qualified plan loan offset amounts to qualified retirement plans.
On January 5, 2021, the IRS issued final regulations that reflect changes the Tax Cuts and Jobs Act (TCJA) made to Internal Revenue Code Section 402(c) regarding rollovers of qualified plan loan offset amounts to qualified retirement plans (see Legal Update, Tax Reform Is Enacted, With Significant Implications for Executive Compensation and Employee Benefits : Employee Benefit-Related Provisions Under the Act).
The final regulations are substantially similar to the proposed regulations the IRS issued on August 17, 2020 (see Legal Update, IRS Proposed Regulations Address Rollovers of Qualified Plan Loan Offset Amounts).
For more information on plan loans, see Practice Note, Qualified Retirement Plan Loans and Qualified Retirement Plan Loans Toolkit.
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.
Final Regulations
The final regulations amend the Treasury regulations to reflect the changes made by the TCJA. In particular, the regulations 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.
Applicability Date
The final regulations are the same as the proposed regulations in all respects except for the applicability date. The proposed regulations would have applied to plan loan offset amounts that are treated as distributed on or after the date the final regulations are published in the Federal Register. However, the final regulations apply to plan loan offset amounts, including qualified plan loan offset amounts, treated as distributed on or after January 1, 2021. This means that these rules will first apply to the 2021 Forms 1099-R required to be filed and furnished in 2022. The preamble to the final regulations explains that the 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.
Additionally, taxpayers, including filers of Form 1099-R, may apply these regulations to plan loan offset amounts, including qualified plan loan offset amounts, treated as distributed on or after August 20, 2020 (the date the proposed regulations were published in the Federal Register).
Practical Implications
Retirement plan sponsors, administrators, and other service providers should familiarize themselves with the final regulations and watch for additional guidance from the IRS. The preamble of the final 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.