The IRS has issued final regulations[1] that provide information on the extended time period for those plan participants receiving a noncash distribution from a retirement plan that is a qualified plan loan offset (QPLO) to rollover the amount to another retirement plan. This provision was added to the law by the Tax Cuts and Jobs Act (TCJA).

The regulations are finalized versions of the proposed regulations issued in August 2020.[2]

The proposed regulations provided that taxpayers may rely on these regulations beginning with respect to plan loan offset amounts, including qualified plan loan offset amounts, treated as distributed on or after the date the proposed regulations are published in the Federal Register[3] and before the date the regulations are published in the Federal Register in final form.[4]

For the most part the final regulations are identical to the proposed regulations, as only a single comment was received by the IRS.

However, the IRS made some modifications to the effective date when the final regulations were published, noting in the preamble to the final regulations:

..[T]he applicability date in these final regulations is revised from the QPLO proposed regulations, which had proposed to apply the regulations to plan loan offset amounts treated as distributed on or after the date of publication of final regulations. Under the revised applicability date, the final regulations will apply to plan loan offset amounts, including qualified plan loan offset amounts, treated as distributed on or after January 1, 2021. Thus, for example, the rules in §1.402(c)-3 will first apply to 2021 Form 1099-Rs required to be filed and furnished in 2022 (more than one year after the date of publication of the final regulations). 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.

The applicability date in these final regulations is also revised to provide that taxpayers (including a filer of a Form 1099-R) may apply these regulations with respect to plan loan offset amounts, including qualified plan loan offset amounts, treated as distributed on or after August 20, 2020, which is the date of the publication of the QPLO proposed regulations.[5]

The specific language for the applicability date in the final regulations reads as follows:

These regulations apply to plan loan offset amounts, including qualified plan loan offset amounts, treated as distributed on or after January 1, 2021. Thus, for example, the rules in §1.402(c)-3 will first apply to 2021 Form 1099-Rs required to be filed and furnished in 2022. However, taxpayers (including a filer of a Form 1099-R) may apply these regulations with respect to plan loan offset amounts, including qualified plan loan offset amounts, treated as distributed on or after August 20, 2020.[6]

TCJA Law Change

The Tax Cuts and Jobs Act revised IRC §402(c)(3) in the following manner, as described in the preamble to the proposed regulations:

Section 13613 of TCJA amended section 402(c)(3) of the Code to provide an extended rollover deadline for qualified plan loan offset (QPLO) amounts (as defined in section 402(c)(3)(C)(ii)). 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 taxable year in which the offset occurs.[7]

Qualified Plan Loan Offset Amount

The preamble to the proposed regulations noted that a QPLO amount is defined under the statute as a plan loan offset amount 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.[8]

The loan must be one that met the requirements to be treated as a plan loan under §72(p)(2) not treated as a distribution right up until such time as the QPLO amount is treated as distributed.[9]

Note that not all plan loan offsets are qualified plan loan offsets—the proposed regulations defined the broad term plan loan offsets as follows:

For purposes of section 402(c), a plan loan offset amount is the amount by which, under the 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 an employee's accrued benefit). A distribution of a plan loan offset amount can occur in a variety of circumstances, for example, when the terms governing a plan loan require that, in the event of the employee's termination of employment or request for a distribution, the loan be repaid immediately or treated as in default. A distribution of a plan loan offset amount also occurs when, under the terms governing the plan loan, the loan is cancelled, accelerated, or treated as if it were in default (for example, when the plan treats a loan as in default upon an employee's termination of employment or within a specified period thereafter). A distribution of a plan loan offset amount is an actual distribution, not a deemed distribution under section 72(p).[10]

A severance from employment is determined by reference to Reg. §1.401(k)-1(d)(2).[11] That regulation provides the following is treated as a severance from employment.[12]

An employee has a severance from employment when the employee ceases to be an employee of the employer maintaining the plan. An employee does not have a severance from employment if, in connection with a change of employment, the employee’s new employer maintains such plan with respect to the employee. For example, a new employer maintains a plan with respect to an employee by continuing or assuming sponsorship of the plan or by accepting a transfer of plan assets and liabilities (within the meaning of section 414(l)) with respect to the employee.[13]

The distribution is deemed to be offset due to the termination of employment when the following conditions are met:

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 repayment terms of a plan loan because of severance from employment of the employee 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.[14]

Note that this provides a 12-month period during which the QPLO must be recognized by the plan to be covered under these rules.

Time Period to Rollover the QPLO Amount

QPLO amounts receive an extended time period during which they can be rolled over by the former participant to another retirement plan. That period runs from the date of the QPLO amount distribution up through the individual’s tax filing due date (including extensions) for the taxable year in which the QPLO amount is treated as distributed from the plan.[15]

The preamble to the proposed regulations provided that this rollover will be covered by the automatic extended time period to complete certain actions provided by Reg. §301.9100-2(b), so that a taxpayer that files his/her return timely will have until the extended due date of that return to complete the rollover even if no extension of time to file the return is requested. This discussion is referenced in the final regulation preamble. The preamble notes:

If a taxpayer to whom a QPLO amount is distributed satisfies the conditions in §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.[16]

The provisions of Reg. §301.9100-2(b) apply to taxpayers that meet the following two conditions:

The taxpayer’s return was timely filed for the year the QPLO amount is treated as distributed; and
The taxpayer takes appropriate corrective action within the six-month period following the original unextended due date (in this case that means completes the rollover).[17]

The extended period to rollover the QPLO amount does not extend the time to rollover any part of the rollover distribution that is not a QPLO amount (that is, normally the portion received in cash or employer securities by the employee or amounts withheld and transmitted to the IRS by the plan as federal withholding taxes for the participant).

Examples

The regulations provide the following examples of applying its provisions:

Example 1, Reg. §1.402(c)-3(a)(2)(v)

Direct rollover of balance after QPLO

(1) In 2020, Employee A has an account balance of $10,000 in Plan Y, of which $3,000 is invested in a plan loan to Employee A that is secured by Employee A’s account balance in Plan Y. Employee A has made no after-tax employee contributions to Plan Y. The plan loan meets the requirements of section 72(p)(2). Plan Y does not provide any direct rollover option with respect to plan loans. Employee A severs from employment on June 15, 2020. After severance from employment, Plan Y accelerates the plan loan and provides Employee A 90 days to repay the remaining balance of the plan loan. Employee A, who is under the age set forth in section 401(a)(9)(C)(i)(II), does not repay the loan within the 90 days and instead elects a direct rollover of Employee A’s entire account balance in Plan Y. On September 18, 2020 (within the 12-month period beginning on the date that Employee A severed from employment), Employee A’s outstanding loan is offset against the account balance.

(2) In order to satisfy section 401(a)(31), Plan Y must make a direct rollover by paying $7,000 directly to the eligible retirement plan chosen by Employee A. When Employee A’s account balance was offset by the amount of the $3,000 unpaid loan balance, Employee A received a plan loan offset amount (equivalent to $3,000) that is an eligible rollover distribution. However, under §1.401(a)(31)-1, Q&A-16, Plan Y satisfies section 401(a)(31), even though a direct rollover option was not provided with respect to the $3,000 plan loan offset amount.

(3) No withholding is required under section 3405(c) on account of the distribution of the $3,000 plan loan offset amount because no cash or other property (other than the plan loan offset amount) is received by Employee A from which to satisfy the withholding.

(4) The $3,000 plan loan offset amount is a qualified plan loan offset amount within the meaning of paragraph (a)(2)(iii)(B) of this section. Accordingly, Employee A may roll over up to the $3,000 qualified plan loan offset amount to an eligible retirement plan within the period that ends on the employee’s tax filing due date (including extensions) for the taxable year in which the offset occurs.

Example 2, Reg. §1.402(c)-3(a)(2)(v)

No QPLO at time of severance of employment, later loan default

(1) The facts are the same as in Example 1, except that, rather than accelerating the plan loan, Plan Y permits Employee A to continue making loan installment payments after severance from employment. Employee A continues making loan installment payments until January 1, 2021, at which time Employee A does not make the loan installment payment due on January 1, 2021. In accordance with §1.72(p)-1, Q&A-10, Plan Y allows a cure period that continues until the last day of the calendar quarter following the quarter in which the required installment payment was due. Employee A does not make a plan loan installment payment during the cure period. Plan Y offsets the unpaid $3,000 loan balance against Employee A's account balance on July 1, 2021 (which is after the 12-month period beginning on the date that Employee A severed from employment).

(2) The conclusion is the same as in Example 1, except that the $3,000 plan loan offset amount is not a qualified plan loan offset amount (because the offset did not occur within the 12-month period beginning on the date that Employee A severed from employment). Accordingly, Employee A may roll over up to the $3,000 plan loan offset amount to an eligible retirement plan within the 60-day period provided in section 402(c)(3)(A) (rather than within the period that ends on Employee A's tax filing due date (including extensions) for the taxable year in which the offset occurs).

Example 3, Reg. §1.402(c)-3(a)(2)(v)

Offset due to terms of plan, employee does not request an offset

(1) The facts are the same as in Example 1, except that the terms governing the plan loan to Employee A provide that, upon severance from employment, Employee A’s account balance is automatically offset by the amount of any unpaid loan balance to repay the loan. Employee A severs from employment but does not request a distribution from Plan Y. Nevertheless, pursuant to the terms governing the plan loan, Employee A’s account balance is automatically offset on June 15, 2020, by the amount of the $3,000 unpaid loan balance.

(2) The $3,000 plan loan offset amount is a qualified plan loan offset amount within the meaning of paragraph (a)(2)(iii)(B) of this section. Accordingly, Employee A may roll over up to the $3,000 qualified plan loan offset amount to an eligible retirement plan within the period that ends on Employee A’s tax filing due date (including extensions) for the taxable year in which the offset occurs.

Example 4, Reg. §1.402(c)-3(a)(2)(v)

Employee takes a cash distribution after QPLO rather than a direct rollover

(1) The facts are the same as in Example 1, except that Employee A elects to receive a cash distribution of the account balance that remains after the $3,000 plan loan offset amount, instead of electing a direct rollover of the remaining account balance.

(2) The amount of the distribution received by Employee A is $10,000 (not $3,000). Because the amount of the $3,000 plan loan offset amount attributable to the loan is included in determining the amount of the eligible rollover distribution to which withholding applies, withholding in the amount of $2,000 (20 percent of $10,000) is required under section 3405(c). The $2,000 is required to be withheld from the $7,000 to be distributed to Employee A in cash, so that Employee A actually receives a cash amount of $5,000.

(3) The $3,000 plan loan offset amount is a qualified plan loan offset amount within the meaning of paragraph (a)(2)(iii)(B) of this section. Accordingly, Employee A may roll over up to the $3,000 qualified plan loan offset to an eligible retirement plan within the period that ends on the Employee A's tax filing due date (including extensions) for the taxable year in which the offset occurs. In addition, Employee A may roll over up to $7,000 (the portion of the distribution that is not related to the offset) within the 60-day period provided in section 402(c)(3).

Note that in this example, the employee will need to come up with the $2,000 of taxes withheld within 60 days to complete a rollover. Only the $3,000 QPLO amount receives the extended period during which a rollover may be completed.

Example 5, Reg. §1.402(c)-3(a)(2)(v)

Employer securities rather than cash distributed

(1) The facts are the same as in Example 4, except that the $7,000 distribution to Employee A after the offset consists solely of employer securities within the meaning of section 402(e)(4)(E).

(2) No withholding is required under section 3405(c) because the distribution consists solely of the $3,000 plan loan offset amount and the $7,000 distribution of employer securities. This is the result because the total amount required to be withheld does not exceed the sum of the cash and the fair market value of other property distributed, excluding plan loan offset amounts and employer securities.

(3) Employee A may roll over up to the $7,000 of employer securities to an eligible retirement plan within the 60-day period provided in section 402(c)(3). The $3,000 plan loan offset amount is a qualified plan loan offset amount within the meaning of paragraph (a)(2)(iii)(B) of this section. Accordingly, Employee A may roll over up to the $3,000 qualified plan loan offset amount to an eligible retirement plan within the period that ends on Employee A's tax filing due date (including extensions) for the taxable year in which the offset occurs.

Example 6, Reg. §1.402(c)-3(a)(2)(v)

Employee fails to make payments on plan loan

(1) Employee B, who is age 40, has an account balance in Plan Z. Plan Z provides for no after-tax employee contributions. In 2022, Employee B receives a loan from Plan Z, the terms of which satisfy section 72(p)(2), and which is secured by elective contributions subject to the distribution restrictions in section 401(k)(2)(B).

(2) Employee B fails to make an installment payment due on April 1, 2023, or any other monthly payments thereafter. In accordance with §1.72(p)-1, Q&A-10, Plan Z allows a cure period that continues until the last day of the calendar quarter following the quarter in which the required installment payment was due (September 30, 2023). Employee B does not make a plan loan installment payment during the cure period. On September 30, 2023, pursuant to section 72(p)(1), Employee B is taxed on a deemed distribution equal to the amount of the unpaid loan balance. Pursuant to §1.402(c)-2, Q&A4(d), the deemed distribution is not an eligible rollover distribution.

(3) Because Employee B has not severed from employment or experienced any other event that permits the distribution under section 401(k)(2)(B) of the elective contributions that secure the loan, Plan Z is prohibited from executing on the loan. Accordingly, Employee B's account balance is not offset by the amount of the unpaid loan balance at the time of the deemed distribution. Thus, there is no distribution of an offset amount that is an eligible rollover distribution on September 30, 2023.

Example 7, Reg. §1.402(c)-3(a)(2)(v)

Employee defaults on plan loan, separates from service afterward

(1) The facts are the same as in Example 6, except that Employee B has a severance from employment on November 1, 2023. On that date, Employee B's unpaid loan balance is offset against the account balance on distribution.

(2) The plan loan offset amount is not a qualified plan loan offset amount. Although the offset occurred within 12 months after Employee B severed from employment, the plan loan does not meet the requirement in paragraph (a)(2)(iii)(B) of this section (that the plan loan meet the requirements of section 72(p)(2) immediately prior to Employee B's severance from employment). Instead, the loan was taxable on September 30, 2023 (prior to Employee B's severance from employment on November 1, 2023), because of the failure to meet the level amortization requirement in section 72(p)(2)(C). Accordingly, Employee B may roll over the plan loan offset amount to an eligible retirement plan within the 60-day period provided in section 402(c)(3)(A) (rather than within the period that ends on Employee B's tax filing due date (including extensions) for the taxable year in which the offset occurs).

[1] TD 9937, January 5, 2021 (to be published January 6, 2020), https://public-inspection.federalregister.gov/2020-27151.pdf?utm_medium=email&utm_campaign=pi+subscription+mailing+list&utm_source=federalregister.gov (retrieved January 5, 2021)

[2] REG-116475-19, August 17, 2020 (to be published on August 20, 2020), https://s3.amazonaws.com/public-inspection.federalregister.gov/2020-16564.pdf (retrieved August 17, 2020)

[3] Scheduled per the original draft release to be published on August 20, 2020

[4] REG-116475-19, August 17, 2020, Proposed Applicability Date and page one header on the original draft released in PDF form on August 17

[5] TD 9937, January 5, 2021, Supplementary Information, Summary of Comments and Explanation of Provisions

[6] TD 9937, January 5, 2021, Supplementary Information, Applicability Date

[7] REG-116475-19, August 17, 2020, Background, Section 2

[8] REG-116475-19, August 17, 2020, Background, Section 2, Proposed Reg. §1.402(c)-3(a)(2)(iii)(B)(1)

[9] REG-116475-19, August 17, 2020, Background, Section 2, Proposed Reg. §1.402(c)-3(a)(2)(iii)(B)(2)

[10] Proposed Reg. §1.402(c)-3(a)(2)(iii)(A)

[11] Reg. §1.402(c)-3(a)(2)(iv)(A)

[12] Reg. §1.402(c)-3(a)(2)(ii)(A)

[13] Reg. §1.401(k)-1(d)(2)

[14] Reg. §1.402(c)-3(a)(2)(iv)(B)

[15] Reg. §1.402(c)-3(a)(2)(ii)(B)

[16] REG-116475-19, August 17, 2020, Explanation of Provisions, Section 2, referenced in the Preamble to the Final Regulations in Footnote 4

[17] REG-116475-19, August 17, 2020, Background, Section 2