Seyfarth Synopsis: Back in 2015, the U.S. Securities and Exchange Commission (“SEC”) issued proposed rules on the pay-for-performance disclosure required under the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 (“Dodd-Frank”). While that proposal generated much commentary at the time, the rules were never finalized. Seemingly to refresh the debate and move things
Seyfarth Synopsis: The IRS released final regulations, under T.D. 9937, that generally adopt the proposed rules relating to qualified plan loan offsets issued last year, with one modification relating to the applicability date. Plan administrators should be prepared to evaluate whether their systems can properly track qualified plan loan offsets, which must now be specifically identified in any Form 1099-R that is distributed to an employee.
Many defined contribution plans require an outstanding loan balance to be immediately repaid by a participant in certain events, such as termination of the plan, a request for a distribution, or a participant’s termination of employment. A failure to timely repay the balance results in a loan default. Once in default following one of these events, a participant’s account balance is offset (or reduced) by the amount of his or her outstanding loan balance in satisfaction of that remaining loan balance. This offset amount is treated as an actual distribution from the plan — rather than a “deemed distribution” — and is subject to traditional distribution taxation rules.
Participants can avoid these taxation rules by rolling over the offset amount to an eligible retirement plan, which includes another employer-sponsored defined contribution plan or an IRA, when permissible. Historically, the standard 60-day rollover period applied to a plan loan offset. However, effective January 1, 2018, the tax code was amended by the Tax Cuts and Jobs Act of 2017 to provide an extended rollover period for a type of plan loan offset called a “qualified plan loan offset” or “QPLO.” A QPLO is a plan loan offset that occurs under a defined contribution plan solely due to either:
- Termination of a qualified defined contribution plan, or
- Termination of employment, coupled with an offset that occurs within 12 months after the employee’s termination date.
Under the extended rollover period, a participant may rollover all or a portion of the QPLO any time up until the participant’s federal income tax filing due date, including extensions, for the year that the QPLO was distributed. A plan loan offset amount that is not a QPLO, but is an otherwise eligible rollover distribution, may still be rolled over by a participant or surviving spouse; however, the standard 60-day rollover period applies.
For example, assume a participant terminates employment with an outstanding loan balance of $10,000, and a 401(k) account balance of $50,000. If the participant elects to take a distribution of her account balance immediately following her termination date, she would receive a cash payment of her net account balance, or $40,000, which is her account balance, reduced by the outstanding loan balance. Although the plan issued a check for only $40,000, the plan will report an actual distribution of $50,000 on the participant’s Form 1099-R. In order to avoid having to pay taxes and potential early withdrawal penalties, the participant may roll over the $40,000 amount within 60 days of its distribution under the general rollover rules. Additionally, in order to avoid taxation of and potential penalties on the $10,000 qualified plan loan offset, the participant would be responsible for funding and rolling over that additional $10,000 amount before her tax filing due date, with extensions, for the year of the distribution.
The IRS issued proposed regulations in August 2020 that addressed the extended rollover period associated with QPLOs and solicited comments.
Continue Reading Extended Loan Rollover Timeline: More Flexibility for Participants and More Complexity for Plan Administrators