Compliance Corner

Retirement Updates

DOL Proposes Rule on Qualified Plan Loan Offset Rollovers

September 01, 2020

On August 20, 2020, the DOL issued a proposed rule on qualified plan loan offset rollovers. As background, when a plan loan must be paid immediately (usually due to default or termination of employment) and goes unpaid, the loan is treated as a deemed distribution or a loan offset. The deemed distribution would occur if the participant is able to take a distribution under the plan terms. An offset, or a reduction of the account balance by the unpaid portion of the loan, would occur if the participant is not yet able to take a distribution. Offsets are treated like an actual distribution for rollover purposes, meaning that the offset must generally be rolled over to a qualified retirement plan within 60 days to avoid taxation of the offset amount.

However, an offset that is deemed a qualified plan loan offset (QPLO) can be rolled over at any time up to the individual’s tax filing deadline for the year in which the offset occurred. QPLOs were introduced by the Tax Cuts and Jobs Act (TCJA) of 2017. In order for the offset to be a QPLO, the offset loan has to meet all the IRC requirements for rollovers, and the distribution of the loan offset must occur “solely” because the person failed to repay the loan due to termination of employment or plan participation. Unfortunately, though, the TCJA did not actually define what it means for the loan offset to occur “solely” because of the termination of the participant.

This proposed rule answers that question by indicating that an offset occurs “solely” due to the termination of employment if the plan loan offset occurs because of the failure to repay the loan and it occurs during the first year following employment termination. This can be the case even where the participant is able to make some loan payments following termination.

QPLOs will be reported using Box 7 of the Form 1099-R. The rules also indicate that plan sponsors and recordkeepers can rely on this guidance until the final rule is published.

Rollover Rules for Qualified Plan Loan Offset Amounts »