Rollover Rules for Qualified Plan Loan Offset Amounts
| Published date | 20 August 2020 |
| Record Number | 2020-16564 |
| Section | Proposed rules |
| Court | Internal Revenue Service |
Federal Register, Volume 85 Issue 162 (Thursday, August 20, 2020)
[Federal Register Volume 85, Number 162 (Thursday, August 20, 2020)]
[Proposed Rules]
[Pages 51369-51374]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2020-16564]
[[Page 51369]]
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DEPARTMENT OF THE TREASURY
Internal Revenue Service
26 CFR Part 1
[REG-116475-19]
RIN 1545-BP46
Rollover Rules for Qualified Plan Loan Offset Amounts
AGENCY: Internal Revenue Service (IRS), Treasury
ACTION: Notice of proposed rulemaking.
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SUMMARY: This document sets forth proposed regulations relating to
amendments made to section 402(c) of the Internal Revenue Code (Code)
by section 13613 of the Tax Cuts and Jobs Act, Public Law 115-97 (131
Stat. 2054) (TCJA). Section 13613 of TCJA provides an extended rollover
period for a qualified plan loan offset, which is a type of plan loan
offset. These regulations affect participants, beneficiaries, sponsors,
and administrators of qualified employer plans.
DATES: Written or electronic comments and requests for a public hearing
must be received by October 5, 2020.
ADDRESSES: Commenters are strongly encouraged to submit public comments
electronically. Submit electronic submissions via the Federal
eRulemaking Portal at www.regulations.gov (indicate IRS and REG-116475-
19) by following the online instructions for submitting comments. Once
submitted to the Federal eRulemaking Portal, comments cannot be edited
or withdrawn. The IRS expects to have limited personnel available to
process public comments that are submitted on paper through mail. Until
further notice, any comments submitted on paper will be considered to
the extent practicable. The Department of the Treasury (Treasury
Department) and the IRS will publish for public availability any
comment received to its public docket, whether submitted electronically
or in hard copy. Send hard copy submissions to CC:PA:LPD:PR (REG-
116475-19), Room 5203, Internal Revenue Service, P.O. Box 7604, Ben
Franklin Station, Washington, DC 20044.
FOR FURTHER INFORMATION CONTACT: Concerning the proposed amendments to
the regulations, Naomi Lehr at (202) 317-4102, Vernon Carter at (202)
317-6799, or Pamela Kinard at (202) 317-6000; concerning submissions of
comments and requests for a hearing, Regina Johnson at (202) 317-5177
(not toll-free numbers).
SUPPLEMENTARY INFORMATION:
Background
This document sets forth proposed amendments to 26 CFR part 1, by
adding Sec. 1.402(c)-3 to the Income Tax Regulations solely to reflect
changes to section 402(c) of the Code, as amended by section 13613 of
TCJA. On December 20, 2019, the Further Consolidated Appropriations Act
of 2020, Public Law 116-94 (133 Stat. 2534) (the Act), was enacted.
Section 114 of Division O of the Act, titled ``Setting Every Community
Up for Retirement Enhancement Act of 2019'' (SECURE Act), amended
section 401(a)(9) of the Code by changing the required beginning date
applicable to section 401(a) plans and other eligible retirement plans
described in section 402(c)(8). The Treasury Department and IRS
anticipate providing separate guidance on section 114 of the SECURE
Act, including amending Sec. 1.402(c)-2 to reflect changes made by the
SECURE Act and to add new level designations for each paragraph in the
questions and answers to satisfy Federal Register requirements. It is
anticipated that the proposed Sec. 1.402(c)-3 will be combined with
Sec. 1.402(c)-2 in connection with that project (including replacing
Q&-9 of Sec. 1.402(c)-2 with paragraph (a) of proposed Sec. 1.402(c)-
3).
1. Plan Loans, Eligible Rollover Distributions, and Plan Loan Offset
Amounts
Section 72(p)(1) provides that if, during any taxable year, a
participant or beneficiary receives (directly or indirectly) any amount
as a loan from a qualified employer plan (as defined in section
72(p)(4)(A)),\1\ such amount shall be treated as having been received
by the individual as a distribution from the plan. For certain plan
loans, section 72(p)(2) provides an exception to the general treatment
of loans as distributions under section 772(p)(1).
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\1\ Under section 72(p)(4), a qualified employer plan means a
qualified plan, a section 403(a) annuity plan, a section 403(b)
plan, and any governmental plan.
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For the exception under section 72(p)(2) to apply so that a plan
loan is not treated as a distribution under section 72(p)(1) for the
taxable year in which the loan is received, the loan generally must
satisfy three requirements:
(1) The loan, by its terms, must satisfy the limits on loan
amounts, as described in section 72(p)(2)(A);
(2) The loan, by its terms, generally must be repayable within 5
years, as described in section 72(p)(2)(B); and
(3) The loan must require substantially level amortization over the
term of the loan, as described in section 72(p)(2)(C).
Section 401(a)(31) requires that a plan qualified under section
401(a) provide for the direct transfer of eligible rollover
distributions. A similar rule applies to section 403(a) annuity plans,
section 403(b) tax-sheltered annuities, and section 457 eligible
governmental plans. See generally sections 403(a)(1), 403(b)(10), and
457(d)(1)(C).
Sections 402(c)(3) and 408(d)(3) provide that any amount
distributed from a qualified plan or individual retirement account or
annuity (IRA) will be excluded from income if it is transferred to an
eligible retirement plan no later than the 60th day following the day
the distribution is received. A similar rule applies to section 403(a)
annuity plans, section 403(b) tax-sheltered annuities, and section 457
eligible governmental plans. See generally sections 403(a)(4)(B),
403(b)(8)(B), and 457(e)(16)(B).
Sections 402(c)(3)(B) and 408(d)(3)(I) provide that the Secretary
may waive the 60-day rollover requirement ``where the failure to waive
such requirement would be against equity or good conscience, including
casualty, disaster, or other events beyond the reasonable control of
the individual subject to such requirement.'' See generally Rev. Proc.
2016-47, 2016-37 I.R.B. 346, which sets forth a self-certification
procedure that taxpayers may use in certain circumstances to claim a
waiver of the 60-day deadline for completing a rollover under section
402(c)(3)(B) or 408(d)(3)(I), and Rev. Proc. 2020-4, 2020-1 I.R.B. 148,
which sets forth procedures that taxpayers may use to request a waiver
of the 60-day rollover deadline by submitting a request for a private
letter ruling.\2\
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\2\ Note that the 60-day rollover deadline can also be extended
to provide temporary relief during a disaster or an emergency
response. For example, in response to the COVID-19 pandemic, Notice
2020-23, 2020-18 I.R.B. 742, extended the 60-day rollover deadline
to July 15, 2020, for distributions made between April 1, 2020, and
July 14, 2020.
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Section 1.402(c)-2, Q&A-3(a), provides that, unless specifically
excluded, an eligible rollover distribution means any distribution to
an employee (or to a spousal distributee described in Sec. 1.402(c)-2,
Q&A-12(a)) of all or any portion of the balance to the credit of the
employee in a qualified plan. Section 1.402(c)-2, Q&A-3(b), provides
that certain distributions (for example, required minimum distributions
under section 401(a)(9)) are not eligible rollover distributions.
[[Page 51370]]
Section 1.402(c)-2, Q&A-9(a), provides that a distribution of a
plan loan offset amount (as defined in Sec. 1.402(c)-2, Q&A-9(b)) is
an eligible rollover distribution if it satisfies Sec. 1.402(c)-2,
Q&A-3. Thus, an amount not exceeding the plan loan offset amount may be
rolled over by the employee (or spousal distributee) to an eligible
retirement plan within the 60-day period described in section
402(c)(3), unless the plan loan offset amount fails to be an eligible
rollover distribution for another reason.
Section 1.402(c)-2, Q&A-9(b), provides that a distribution of a
plan loan offset amount is a distribution that occurs when, under the
plan terms governing the loan, the employee's accrued benefit is
reduced (offset) in order to repay the loan. This may occur when, for
example, the terms governing a plan loan require that, in the event of
an employee's termination of employment or request for a distribution,
the loan is to be repaid immediately or treated as in default. A plan
loan offset may also occur when, under the terms of the plan loan, the
loan is canceled, accelerated, or treated as if it is in default (for
example, if the plan treats a loan as in default upon an employee's
termination of employment or within a specified period thereafter). See
also Sec. 1.72(p)-1, Q&A-13(a)(2). Because a plan loan offset is an
actual distribution for purposes of the Code, not a deemed distribution
under section 72(p), a plan loan offset cannot occur prior to a
distributable event. See generally Sec. 1.72(p)-1, Q&A-13(b).
2. Qualified Plan Loan Offset Amounts
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)).\3\ 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.
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\3\ In addition to TCJA, other statutory provisions may extend
the period to roll over a plan loan offset. For example, section
2202(a) of the Coronavirus Aid, Relief, and Economic Security Act,
Public Law 116-136, 134 Stat. 281 (2020) (CARES Act), permits an
individual to receive from an eligible retirement plan up to
$100,000 for a coronavirus-related distribution (which may include a
plan loan offset that otherwise meets the requirements to be a
coronavirus-related distribution). A qualified individual with a
coronavirus-related distribution (which may be included in gross
income ratably over the 3-year period beginning with the taxable
year of the distribution) may recontribute up to the amount of the
distribution to an applicable eligible retirement plan in which the
individual is a beneficiary and to which a rollover can be made. For
further information relating to the interaction of section 2202 of
the CARES Act and plan loan offsets, see Notice 2020-50, 2020-28
I.R.B. 35.
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A QPLO amount is defined in section 402(c)(3)(C)(ii) as a plan loan
offset amount that is treated as distributed from a qualified employer
plan to an employee or beneficiary solely by reason of:
(1) The termination of the qualified employer plan, or
(2) The failure to meet the repayment terms of the loan from such
plan because of the severance from employment of the employee.
In addition, section 402(c)(3)(C)(iv) provides that the extended
rollover period will not apply ``to any plan loan offset amount unless
such plan loan offset amount relates to a loan to which section
72(p)(1) does not apply by reason of section 72(p)(2).''
Section 301.9100-2(b) of the regulations provides rules for
automatic six-month extensions to make regulatory or statutory
elections. Under this rule, a taxpayer will receive an automatic
extension of 6 months from the due date of a return, excluding
extensions, to make elections that otherwise must be made by the due
date of the return plus extensions, provided that:
(1) The taxpayer's return was timely filed for the year the
election should have been made; and
(2) The taxpayer takes appropriate corrective action within the
six-month period.
Section 301.9100-2(b) further provides that paragraph (b) does not
apply to regulatory or statutory elections that must be made by the due
date of the return excluding extensions.
Explanation of Provisions
1. In General
These proposed regulations add Sec. 1.402(c)-3 to take into
account changes to the rollover rules made by section 13613 of TCJA
with respect to QPLO amounts. As an initial matter, the proposed
regulations confirm that a QPLO is a type of plan loan offset;
accordingly, most of the general rules relating to plan loan offset
amounts apply to QPLO amounts. For example, the rule that a plan loan
offset amount is an eligible rollover distribution applies to a QPLO
amount. In addition, the rules in Sec. 1.401(a)(31)-1, Q&A-16
(guidance concerning the offering of a direct rollover of a plan loan
offset amount), and Sec. 31.3405(c)-1, Q&A-11 (guidance concerning
special withholding rules with respect to plan loan offset amounts),
applicable to plan loan offset amounts in general, apply to QPLO
amounts. The proposed regulations provide examples to illustrate the
interaction of the special rules for QPLOs with the general rules for
plan loan offsets.
2. Rollover Period for Plan Loan Offset Amounts, Including QPLO Amounts
Consistent with Sec. 1.402(c)-2, Q&A-9, the proposed regulations
provide that a distribution of a plan loan offset amount that is an
eligible rollover distribution and not a QPLO amount may be rolled over
by the employee (or spousal distributee) to an eligible retirement plan
(as defined in section 402(c)(8)(B)) within the 60-day period set forth
in section 402(c)(3)(A). While a plan loan offset generally is subject
to this 60-day rollover period, there are special rules for the waiver
of the 60-day rollover deadline. For further discussion of the special
rules, see the Background section of this preamble.
Consistent with the amended provisions of section 402(c)(3)(C), the
proposed regulations provide that a distribution of a plan loan offset
amount that is an eligible rollover distribution and a QPLO amount may
be rolled over by the employee (or spousal distributee) to an eligible
retirement plan through the period ending on the individual's tax
filing due date (including extensions) for the taxable year in which
the offset is treated as distributed from a qualified employer plan.
Thus, a taxpayer with an eligible rollover distribution that is a QPLO
amount may roll over any portion of the distribution to an eligible
retirement plan, including another qualified retirement plan (if that
plan permits) or an IRA, by the taxpayer's deadline for filing income
taxes for the year of the distribution, including extensions.
If a taxpayer to whom a QPLO amount is distributed satisfies the
conditions in Sec. 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. For example, if, on June
1, 2020, Taxpayer A has an eligible rollover distribution of $10,000
that is a QPLO amount, she may be able to roll over the $10,000 amount
as late as October 15, 2021. Pursuant to Sec. 301.9100-2(b), this
automatic six-month extension applies if Taxpayer A timely files her
tax return by April 15, 2021 (the due date of her return), rolls over
the QPLO amount within the six-month period ending on October 15, 2021,
and amends her return by October 15, 2021, as necessary to reflect the
[[Page 51371]]
rollover. See the further discussion of Sec. 301.9100-2(b) in the
Background section of this preamble.
3. Definitions of Plan Loan Offset Amount, QPLO Amount, and Qualified
Employer Plan
Consistent with Sec. 1.402(c)-2, Q&A-9(b), the proposed
regulations provide that a plan loan offset amount is the amount by
which, under 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 the employee's accrued
benefit). A distribution of a plan loan offset amount is an actual
distribution, not a deemed distribution under section 72(p).
Section 1.402(c)-3(a)(2)(iii)(B) of the proposed regulations
defines a QPLO amount as a plan loan offset amount that satisfies two
requirements. First, the plan loan offset amount must be 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. Second, the plan loan offset amount must relate to a plan
loan that met the requirements of section 72(p)(2) immediately prior to
the termination of the qualified employer plan or the severance from
employment of the employee, as applicable.
The proposed regulations define a qualified employer plan, for
purposes of the QPLO amount definition, as a qualified employer plan as
defined in section 72(p)(4). For a discussion of the definition of a
qualified employer plan, see the Background section of this preamble.
4. Special Rules for QPLO Determinations
The proposed regulations provide several special rules for purposes
of determining whether a plan loan offset amount is a QPLO amount.
First, the proposed regulations provide that whether an employee has a
severance from employment with the employer that maintains the
qualified employer plan is determined in the same manner as under Sec.
1.401(k)-1(d)(2). Thus, an employee has a severance from employment
when the employee ceases to be an employee of the employer maintaining
the plan.
Second, the proposed regulations provide that 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
plan loan repayment terms because of severance from employment 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.
Whether a plan loan offset amount is a QPLO amount is relevant to
plan administrators because those administrators are responsible for
reporting whether a distribution is a plan loan offset amount or a QPLO
amount on Form 1099-R, Distributions From Pensions, Annuities,
Retirement or Profit-Sharing Plans, IRAs, Insurance Contracts, etc.,
and furnishing that form to the taxpayer. The Instructions to the 2020
Form 1099-R provide that if an employee's accrued benefit is offset to
repay a loan (a plan loan offset amount), the administrator should
report the distribution as an actual distribution and not use Code L
(for deemed distributions) in box 7. For a QPLO amount, the
instructions to the 2020 Form 1099-R provide that the administrator
should enter Code M (for QPLO amounts) in box 7. The Treasury
Department and the IRS anticipate that the proposed 12-month rule will
assist plan administrators in identifying QPLO amounts by providing a
bright-line rule for determining whether a plan loan offset amount
following a severance from employment is a QPLO amount.
Proposed Applicability Date
These regulations are proposed to apply to plan loan offset
amounts, including qualified plan loan offset amounts, treated as
distributed on or after the date of publication of a Treasury decision
adopting these rules as final regulations in the Federal Register.
Taxpayers, however, may rely on these proposed regulations with respect
to plan loan offset amounts, including qualified plan loan offset
amounts, treated as distributed on or after August 20, 2020 and before
the date these regulations are published as final regulations in the
Federal Register.
Statement of Availability for IRS Documents
For copies of recently issued Revenue Procedures, Revenue Rulings,
Notices, and other guidance published in the Internal Revenue Bulletin,
please visit the IRS website at https://www.irs.gov.
Special Analyses
These proposed regulations are not subject to review under section
6(b) of Executive Order 12866 pursuant to the Memorandum of Agreement
(April 11, 2018) between the Treasury Department and the Office of
Management and Budget regarding review of tax regulations.
In addition, it is hereby certified that these proposed regulations
will not have a significant economic impact on a substantial number of
small entities pursuant to the Regulatory Flexibility Act (5 U.S.C.
chapter 6). This certification is based on the fact that the proposed
regulations would reflect the statutory changes to section 402(c) made
by section 13613 of TCJA. The proposed regulations would reflect the
extended rollover period for QPLO amounts, as amended by TCJA.
Specifically, the proposed regulations would reflect the statute in a
manner that (i) is consistent with the statutory language, (ii)
provides certain clarifications, and (iii) eases and facilitates plan
administration. Although the proposed regulations might affect a
substantial number of individuals, the economic impact of the proposed
regulations is not expected to be significant. The regulations do not
impose any new compliance burdens on taxpayers and are not expected to
result in any economically meaningful changes in behavior.
Notwithstanding this certification that the proposed regulations
would not have a significant economic impact on a substantial number of
small entities, the Treasury Department and the IRS invite comments on
the impacts these proposed regulations may have on small entities.
Pursuant to section 7805(f), these proposed regulations will be
submitted to the Chief Counsel for Advocacy of the Small Business
Administration for comment on their impact on small business.
Comments and Requests for Public Hearing
Before these proposed amendments to the regulations are adopted as
final regulations, consideration will be given to comments that are
submitted timely to the IRS as prescribed in this preamble under the
ADDRESSES section. The Treasury Department and the IRS request comments
on all aspects of the proposed rules. Any electronic comments
submitted, and to the extent practicable any paper comments submitted,
will be available at www.regulations.gov or upon request.
A public hearing will be scheduled if requested in writing by any
person who timely submits electronic or written comments. Requests for
a public hearing are also encouraged to be made electronically. If a
public hearing is scheduled, notice of the date, time, and place for
the public hearing will be
[[Page 51372]]
published in the Federal Register. Announcement 2020-4, 2020-17 I.R.B.
1, provides that, until further notice, public hearings conducted by
the IRS will be held telephonically. Any telephonic hearing will be
made accessible to people with disabilities.
Drafting Information
The principal authors of these regulations are Naomi Lehr and
Pamela R Kinard of the Office of Associate Chief Counsel (Employee
Benefits, Exempt Organizations, and Employment Taxes), although other
persons in the IRS and the Treasury Department participated in their
development.
List of Subjects in 26 CFR Part 1
Income taxes, Reporting and recordkeeping requirements.
Proposed Amendments to the Regulations
Accordingly, 26 CFR part 1 is proposed to be amended as follows:
PART 1--INCOME TAXES
0
Paragraph 1. The authority citation for part 1 continues to read in
part as follows:
Authority: 26 U.S.C. 7805 * * *
0
Par. 2. Section 1.402(c)-3 is added to read as follows:
Sec. 1.402 (c)-3 Eligible rollover distributions; Qualified plan loan
offsets.
(a)(1) Q-1 What special rollover rules apply to a plan loan offset
amount (including a qualified plan loan offset amount)?
(2) A-1--(i) In general--(A) Eligible rollover distribution. A
distribution of a plan loan offset amount, as defined in paragraph
(a)(2)(ii)(A) of this section (including a qualified plan loan offset
amount, a type of plan loan offset amount defined in paragraph
(a)(2)(ii)(B) of this section), is an eligible rollover distribution if
it satisfies Sec. 1.402(c)-2, Q&A-3 and 4.
(B) Other rules relating to plan loan offset amounts. See Sec.
1.401(a)(31)-1, Q&A-16, for guidance concerning the offering of a
direct rollover of a plan loan offset amount. See also Sec.
31.3405(c)-1, Q&A-11, of this chapter for guidance concerning special
withholding rules with respect to plan loan offset amounts.
(ii) Rollover period for a plan loan offset amount--(A) Plan loan
offset amount that is not a qualified plan loan offset amount. A
distribution of a plan loan offset amount that is an eligible rollover
distribution and not a qualified plan loan offset amount may be rolled
over by the employee (or spousal distributee) to an eligible retirement
plan (as defined in Sec. 1.402(c)-2, Q&A-2) within the 60-day period
set forth in section 402(c)(3)(A).
(B) Plan loan offset amount that is a qualified plan loan offset
amount. A distribution of a plan loan offset amount that is an eligible
rollover distribution and that is a qualified plan loan offset amount
may be rolled over by the employee (or spousal distributee) to an
eligible retirement plan within the period set forth in section
402(c)(3)(C), which is the individual's tax filing due date (including
extensions) for the taxable year in which the offset is treated as
distributed from a qualified employer plan.
(iii) Definitions--(A) Plan loan offset amount. 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).
(B) Qualified plan loan offset amount. For purposes of section
402(c), 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 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 because of the severance from
employment of the employee; and
(2) The plan loan offset amount relates to a plan loan that met the
requirements of section 72(p)(2) immediately prior to the termination
of the qualified employer plan or the severance from employment of the
employee, as applicable.
(C) Qualified employer plan. For purposes of section 402(c) and
this section, a qualified employer plan is a qualified employer plan as
defined in section 72(p)(4).
(iv) Special rules for qualified plan loan offset amounts--(A)
Definition of severance from employment. For purposes of paragraph
(a)(2)(iii)(B)(1) of this section, whether an employee has a severance
from employment with the employer that maintains the qualified employer
plan is determined in the same manner as under Sec. 1.401(k)-1(d)(2).
Thus, an employee has a severance from employment when the employee
ceases to be an employee of the employer maintaining the plan.
(B) Offset because of severance from employment. 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.
(v) Examples. The following examples illustrate the rules with
respect to plan loan offset amounts, including qualified plan loan
offset amounts, in this paragraph (a) and in Sec. Sec. 1.401(a)(31)-1,
Q&A-16, and 31.3405(c)-1, Q&A-11, of this chapter. For purposes of
these examples, each reference to a plan refers to a qualified employer
plan as described in section 72(p)(4).
(A) Example 1--(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
[[Page 51373]]
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 Sec. 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.
(B) Example 2--(1) The facts are the same as in paragraph
(a)(2)(v)(A) of this section (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 Sec. 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 paragraph (a)(2)(v)(A) of this
section (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).
(C) Example 3--(1) The facts are the same as in paragraph
(a)(2)(v)(A) of this section (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.
(D) Example 4--(1) The facts are the same as in paragraph
(a)(2)(v)(A) of this section (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).
(E) Example 5--(1) The facts are the same as in paragraph
(a)(2)(v)(D) of this section (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.
(F) Example 6--(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
Sec. 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 Sec. 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
[[Page 51374]]
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.
(G) Example 7--(1) The facts are the same as in in paragraph
(a)(2)(v)(F) of this section (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).
(b)(1) Q-2 When are the rules in this Sec. 1.402(c)-3 applicable
to plan loan offset amounts, including qualified plan loan offset
amounts?
(2) A-2 Applicability date. The rules provided in paragraph (a) of
this section are applicable to plan loan offset amounts, including
qualified plan loan offset amounts, treated as distributed on or after
the adoption of these rules as final regulations in the Federal
Register.
Sunita Lough,
Deputy Commissioner for Services and Enforcement.
[FR Doc. 2020-16564 Filed 8-17-20; 4:15 pm]
BILLING CODE 4830-01-P
