IRS Proffers Proposed Regulations for Qualified Plan Loan Offsets

The IRS has issued proposed regulations for determining whether an offset for an outstanding retirement plan loan receives the extended rollover period for qualified plan loan offsets (QPLOs) provided for by the Tax Cuts and Jobs Act of 2017 (TCJA). 

Plan loan offset rollovers

If a retirement plan participant’s account assets are used to repay a plan loan, the amount used for this purpose – known as an offset – is treated as an eligible rollover distribution and can be rolled over into an eligible retirement plan within 60 days. For tax purposes, a plan loan offset is considered an actual distribution and can occur only if the plan participant has a permissible distribution event.

QPLO rollovers

Under the TCJA, QPLOs qualify for an extended rollover period in which any portion of a QPLO can be rolled over into an eligible retirement plan or an IRA by the participant’s tax filing deadline (including extensions) for the year in which the offset is treated as a distribution. 

A QPLO is defined by the TCJA as a plan loan offset amount that is distributed or treated as distributed from a plan to a participant solely because:

  • The plan is terminated by the employer; or
  • The participant defaults on the loan because of severance from employment.

To avoid having a loan treated as a distribution, the loan must (1) be limited to no more than $50,000, (2) be repayable within five years, and (3) payments must be made at least quarterly. The plan loan offset amount cannot be treated as a QPLO if these loan requirements are not met immediately before the loan offset occurs.

QPLO test

Under the proposed regulations, the IRS provides a test to help plan administrators identify QPLOs following a severance from employment. To meet the severance from employment requirement, a plan loan offset must:

  • Relate to a failure to meet the repayment terms of the plan loan, and
  • Occur within the period beginning on the date of the employee’s severance from employment and ending on the first anniversary of that date.

Plan loan offsets that occur after the 12-month anniversary of the participant’s severance date are to be treated like regular loan offsets subject to the 60-day indirect rollover deadline.

Effective date

Retirement plan administrators and sponsors may rely on the proposed rules from August 20, 2020, until the final regulations are published in the Federal Register.

The ERISA attorneys at Hall Benefits Law help our clients manage legislative and regulatory changes to employee benefit plans. To get help with your plans today, call 678-439-6236.

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Hall Benefits Law, LLC

HBL offers employers comprehensive legal guidance on benefits in mergers and acquisitions, Employee Stock Ownership Plans (ESOPs), executive compensation, health and welfare benefits, healthcare reform, and retirement plans. We counsel a wide spectrum of clients including small, mid-sized, and large companies, 401(k) investment advisors, health insurance brokers, accountants, attorneys, and HR consultants, just to name a few. HBL is passionate about advising clients, and we are dedicated to our mission: to provide comprehensive, personalized, and practical ERISA and benefits legal solutions that exceed client expectations.

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