IRS Issues Final Rules on Rollover of Qualifying Plan Loan Set-offs

On December 7, 2020, the U.S. Internal Revenue Service (IRS) finalized rules that provide guidance on the extended rollover period for Qualified Plan Loan Compensation (QPLO).

Fund

Typically, a plan member will receive a “compensatory” distribution for a plan loan that is not repaid when a member terminates employment or when the plan terminates. This means that the current plan loan amount is treated as a taxable plan distribution to the participant, unless that amount is transferred to another qualified plan or to an Individual Retirement Account (IRA) within 60 days. This requires the participant to provide cash equal to the loan clearing amount and transfer that amount to an IRA or other qualified plan within 60 days to avoid being taxed on that clearing amount, including taxation. an early distribution penalty.

Extended rolling period

The Tax Cuts and Jobs Act of 2017 amended the Internal Revenue Code (Code) to provide for an extended rollover period for QPLOs. A QPLO that is an eligible rolling distribution does not need to be renewed within the 60 day period described above. Instead, a participant can carry forward that QPLO amount to a qualifying pension plan before the deadline (including extensions) of the participant’s income tax return for the year in which the compensation is considered distributed from tax-eligible plan.

Definitions of the compensatory amount of the plan loan, the amount of the OPQP and the employer plan eligible under the final rules

According to the Final Rules, an offset amount for a plan loan is defined as the amount by which the member’s accrued benefits are reduced in order to repay the loan under the terms of the plan governing that loan. A QPLO amount, on the other hand, is defined as a plan loan offset amount that satisfies two additional conditions:

  1. First, the plan loan compensation amount must be treated as distributed from a qualifying employer plan to a member or beneficiary. only because (i) the member does not meet the loan repayment terms because he has terminated his employment, and the plan loan is set off within one year from the date the member terminates his employment. employment with the employer who maintains the plan, or (ii) the employer has terminated this plan.
  2. Second, the plan loan being set off must have met the Code requirements for a loan not to be treated as a taxable distribution (such as limits on plan loan amounts, leveled amortization requirement, and the requirement that the duration of the plan loan not exceed five years, except for certain mortgages) immediately before the member’s employment or the plan terminates.

An eligible employer plan, for the purposes of defining the amount of OLQP, includes a tax-eligible plan described in Article 401 (a) of the Code, an Article 403 (a) annuity plan ) of the Code, a plan under which amounts are contributed by the employer for an annuity contract described in section 403 (b) of the Code and a government plan.

Applicability dates

The final rules apply to plan loan offset amounts, including QPLO amounts, as of January 1, 2021. This means that the rules will first apply to Form 1099-R 2021 which must be filed with from the IRS and provided to participants in 2022, although Form 1099-R filers may also apply the final rules to schedule loan compensation amounts treated as distributed on or after August 20, 2020.

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