IRS Issues Guidance on Rollover Rules for Plan Loan Offset Amounts:

On August 20, 2020, the IRS published proposed regulations addressing a provision of the Tax Cuts and Jobs Act (the “TCJA”), which became law on December 22, 2017.

The TCJA provided a more lenient rule than under previous law if qualified retirement plan participants have an outstanding loan when their plan terminates or when their employment with the plan sponsor terminates. Under the TCJA, such participants have until the due date for filing their tax return (for the year in which the termination occurred) to roll over their outstanding loan balance to an IRA or another employer’s plan. If they do so by that deadline, then their outstanding loan balance is not treated as a taxable distribution solely because of the plan’s termination or their employment’s termination. Under previous law, in general, the outstanding loan balance had to be rolled over within 60 days of the plan’s termination or the participant’s employment termination to avoid a taxable distribution of the outstanding loan balance.

Under the proposed regulations:

• A distribution of a “plan loan offset amount” that is an eligible rollover distribution but not a “qualified plan loan offset amount” can be rolled over by the participant (or spousal distributee) to an eligible retirement plan within 60 days after he or she received the distribution. A “plan loan offset amount” is the amount by which, under the plan terms governing a loan, a participant’s account is reduced (offset) in order to repay the loan. In other words, that involves the outstanding loan balance at the time of the participant’s employment termination or the plan’s termination.
• A “qualified plan loan offset amount” can be rolled over by the employee (or spousal distributee) to an eligible retirement plan by the individual’s tax filing due date (including extensions) for the taxable year in which the offset is treated as distributed from the plan. A “qualified plan loan offset amount” is a “plan loan offset amount” that satisfies the following requirements: (1) the plan loan offset amount is treated as distributed from a qualified employer plan to a participant or beneficiary solely because of the plan’s termination or the participant’s failure to satisfy the loan’s repayment terms because of his or her employment termination; and (2) the plan loan offset amount relates to a plan loan that met the Code’s loan amount limits and repayment requirements immediately before the plan’s termination or the participant’s employment termination.

Plan sponsors can rely on these proposed regulations with respect to plan loan offset amounts and qualified plan loan offset amounts that are treated as distributed on or after August 20, 2020 and before the date these regulations are published as final regulations in the Federal Register.

unts:  On August 20, 2020, the IRS published proposed regulations addressing a provision of the Tax Cuts and Jobs Act (the “TCJA”), which became law on December 22, 2017.

The TCJA provided a more lenient rule than under previous law if qualified retirement plan participants have an outstanding loan when their plan terminates or when their employment with the plan sponsor terminates. Under the TCJA, such participants have until the due date for filing their tax return (for the year in which the termination occurred) to roll over their outstanding loan balance to an IRA or another employer’s plan. If they do so by that deadline, then their outstanding loan balance is not treated as a taxable distribution solely because of the plan’s termination or their employment’s termination. Under previous law, in general, the outstanding loan balance had to be rolled over within 60 days of the plan’s termination or the participant’s employment termination to avoid a taxable distribution of the outstanding loan balance.

Under the proposed regulations:

• A distribution of a “plan loan offset amount” that is an eligible rollover distribution but not a “qualified plan loan offset amount” can be rolled over by the participant (or spousal distributee) to an eligible retirement plan within 60 days after he or she received the distribution. A “plan loan offset amount” is the amount by which, under the plan terms governing a loan, a participant’s account is reduced (offset) in order to repay the loan. In other words, that involves the outstanding loan balance at the time of the participant’s employment termination or the plan’s termination.
• A “qualified plan loan offset amount” can be rolled over by the employee (or spousal distributee) to an eligible retirement plan by the individual’s tax filing due date (including extensions) for the taxable year in which the offset is treated as distributed from the plan. A “qualified plan loan offset amount” is a “plan loan offset amount” that satisfies the following requirements: (1) the plan loan offset amount is treated as distributed from a qualified employer plan to a participant or beneficiary solely because of the plan’s termination or the participant’s failure to satisfy the loan’s repayment terms because of his or her employment termination; and (2) the plan loan offset amount relates to a plan loan that met the Code’s loan amount limits and repayment requirements immediately before the plan’s termination or the participant’s employment termination.

Plan sponsors can rely on these proposed regulations with respect to plan loan offset amounts and qualified plan loan offset amounts that are treated as distributed on or after August 20, 2020 and before the date these regulations are published as final regulations in the Federal Register.