Benefits and Compensation

Tax Reform Extends Participant Plan Loan Offset Payment Period

Defined contribution (DC) plan sponsors should be aware of a change under the new Tax Cuts and Jobs Act that extends the period during which a participant may pay the amount of an “offset” of an outstanding 401(k) plan loan to another qualifying plan or individual retirement account (IRA) to accomplish a tax-free rollover of the amount.


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The change became effective January 1.

The new rule applies to unpaid accrued loan amounts that are offset from the participant’s account at plan termination or after severance from employment, if the plan provides that the accrued unpaid loan amount must be offset at such time. Before this change, the deadline set by the Internal Revenue Service (IRS) to roll over the offset was the 60th day after the date the loan offset arose.

A distribution of a plan loan offset occurs when, under the plan terms, a participant’s accrued benefit is reduced—or offset—to repay the loan. Such a distribution may occur under a variety of circumstances. For example, when plan terms require that, in the event of the participant’s request for a distribution after termination of employment, a loan be repaid immediately or treated as being in default.

No Change for Distributing Plan Sponsors

Although the rule grants an extension for payment of the offset of a plan loan, no guidance has been issued by the IRS to alter reporting requirements for the distributing plan.

Monitoring how much time passes before a participant pays a loan offset amount to another plan or to an IRA could be difficult for distributing plan sponsors, so they may need further guidance from the IRS before amending plan terms to handle such transactions after the tax law revision. Plan sponsors did not monitor the 60 days allowed for repayment under prior law.

As of January 1, the deadline for contribution payment to a rollover account is the filing due date (including extensions) for the participant’s tax return for the year in which the loan offset amount arises. As a result of this change, the loan offset rollover period can be as long as 21 months when the loan offset occurs early in the calendar year and the participant requests an extension of his or her Form 1040 filing deadline for the year of the offset.

Law firm Jackson Lewis P.C. noted in a January 2 client bulletin that the change means that a qualifying participant who desires to defer taxes on the maximum amount of distributions by rolling over all of his or her distributed account in a plan (including qualified plans such as 401(k) plans, 403(b) plans or governmental 457(b) plans) will now have significantly more time to accumulate from other sources an amount equal to the accrued and outstanding unpaid principal and interest on any plan loan that was earlier extended and treated as an offset before paying and rolling over the amount to another qualifying plan or IRA.

Not for All Offset Amounts

The firm noted, however, that such tax-free rollover treatment does not apply to any offset amount under a loan that has already been deemed to be taxed as a distribution under the federal tax code (and reportable on Form 1099-R) either because its terms did not comply with the Code or because it remained in default past the plan’s default cure period. The period can’t be longer than the end of the calendar quarter that begins after the quarter in which the default arises.

The amount of such a defaulted loan will, absent correction under the IRS’s Employee Plans Compliance Resolution System (EPCRS) procedures, be treated at the end of the allowed cure period as if it were a taxable distribution from the plan that can also be subject to the 10% early-distribution penalty tax.

“Remember that a loan offset amount is treated as both a repayment and a distribution of a plan loan amount. Therefore, unless a deemed tax distribution has occurred, the offset amount will be taxed to a participant, except where an amount equal to the offset is timely rolled over tax-free by the participant,” Jackson Lewis said.

This liberalization of the rollover period for offsets should make many more such rollovers possible, the firm concluded.

Jane Meacham is the editor of BLR’s retirement plan compliance publications. She has nearly 30 years’ experience as a writer/editor of financial services news.