IRS Issues Final Guidance for Retirement Plan Loan Offset Rollovers

The IRS recently issued final regulations implementing a provision of the 2017 Tax Cuts and Jobs Act (“TCJA”) that permits an extension beyond the normal 60-day period to roll over the amount of loans from certain retirement plans, such as 401(k) profit sharing plans, 403(b) plans, or 457(b) plans, that are offset and treated as distributions.

Background

Prior to the extension added under the provisions of the TCJA, a participant receiving an offset distribution for a loan that was not repaid at the time a participant terminated employment or upon the termination of the plan would have had 60 days to come up with the cash to make up for the loan offset amount and roll that amount into an IRA or qualified plan to avoid being taxed on the amount and potentially subject to the 10% penalty on early distributions.

The TCJA amended the law to provide an extended rollover deadline for qualified plan loan offset (“QPLO”) amounts. A QPLO amount is a plan loan offset amount that satisfies the following requirements: 

The plan loan offset amount is 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 because of the severance from employment of the employee; and  The plan loan offset amount relates to a plan loan that met the requirements of IRC Sec. 72(p)(2) immediately prior to the termination of the qualified employer plan or the severance from employment of the employee, as applicable.

Final Regulation

Consistent with the TCJA provision and the proposed regulations, the final regulations extend the period allowed for a qualified plan loan offset amount received by a participant to be contributed to an eligible retirement plan or an IRA as a rollover contribution from the normal 60 days period to the due date, including extensions, for filing the individual’s federal income tax return for the tax year in which the loan offset occurs. This extension applies to a qualified plan loan offset amount distributed from a qualified retirement plan, such as a 401(k), 403(b), or governmental 457(b) plan solely because of a termination of the plan or the failure to meet the repayment terms because of a severance from employment.  A plan loan that is offset for other reasons, such as for a failure to meet required payments while still employed, is not a QPLO and does not qualify for the extended rollover period. The final regulations provide guidance and examples to help in making such determinations. 

These regulations apply to plan loan offset amounts including qualified plan loan offset amounts that are treated as distributed on or after January 1, 2021.