[Federal Register Volume 86, Number 3 (Wednesday, January 6, 2021)]
[Rules and Regulations]
[Pages 464-469]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2020-27151]
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DEPARTMENT OF THE TREASURY
Internal Revenue Service
26 CFR Part 1
[TD 9937]
RIN 1545-BP46
Rollover Rules for Qualified Plan Loan Offset Amounts
AGENCY: Internal Revenue Service (IRS), Treasury.
ACTION: Final regulations.
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SUMMARY: This document sets forth final 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 (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:
Effective Date: These regulations are effective on January 6, 2021.
Applicability Date: For date of applicability, see Sec. 1.402(c)-
3(b)(2).
FOR FURTHER INFORMATION CONTACT: Naomi Lehr at (202) 317-4102, Vernon
Carter at (202) 317-6799, or Pamela Kinard at (202) 317-6000 (not toll-
free numbers).
SUPPLEMENTARY INFORMATION:
Background
This document amends 26 CFR part 1, by adding Sec. 1.402(c)-3 to
the Income Tax Regulations to reflect changes to section 402(c) of the
Code, as amended by section 13613 of TCJA (Pub. L. 115-97 (131 Stat.
2054)).
1. Plan Loans, Eligible Rollover Distributions, and Plan Loan Offset
Amounts
Section 72(p)(1) of the Code 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\ that 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 72(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.
2020-46, 2020-45 I.R.B. 995, 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.
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
[[Page 465]]
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 to
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.
Notice of Proposed Rulemaking
1. In General
On August 20, 2020, the Department of the Treasury (Treasury
Department) and the IRS published a notice of proposed rulemaking (REG-
116475-19) in the Federal Register (85 FR 51369) setting forth rules in
new Sec. 1.402(c)-3 for qualified plan loan offsets (QPLO proposed
regulations). As described in the background of the preamble to the
QPLO proposed regulations, the Treasury Department and IRS anticipate
providing separate guidance with respect to Division O of the Further
Consolidated Appropriations Act of 2020, Public Law 116-94 (133 Stat.
2534), titled ``Setting Every Community Up for Retirement Enhancement
Act of 2019'' (SECURE Act). As part of that guidance, the Treasury
Department and IRS anticipate amending Sec. 1.402(c)-2 to reflect
changes made by section 114 of the SECURE Act (relating to changes to
section 401(a)(9) of the Code to the required beginning date applicable
to section 401(a) plans and other eligible retirement plans described
in section 402(c)(8)) and to add new level designations for each
paragraph in the questions and answers to satisfy Federal Register
requirements. It is anticipated that Sec. 1.402(c)-3, which includes
both the new QPLO rules and already existing plan loan offset rules in
Q&A-9 of Sec. 1.402(c)-2, will be combined with Sec. 1.402(c)-2 in
connection with that project (including replacing Q&A-9 of Sec.
1.402(c)-2 with paragraph (a) of Sec. 1.402(c)-3).
As an initial matter, the QPLO 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 QPLO 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
Section 1.402(c)-3(a)(2)(ii)(A) of the QPLO proposed regulations
provides 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.
Section 1.402(c)-3(a)(2)(ii)(B) of the QPLO proposed regulations
provides 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.\4\
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\4\ For a detailed discussion of the application of Sec.
301.9100-2(b) (which provides rules for automatic six-month
extensions to make regulatory or statutory elections) to the
extended rollover period for QPLO amounts, see the preamble
discussion in the Explanation of Provisions section of the QPLO
proposed regulations, under the heading, Rollover Period for Plan
Loan Offset Amounts, Including QPLO Amounts.
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[[Page 466]]
3. Definitions of Plan Loan Offset Amount, QPLO Amount, and Qualified
Employer Plan
Section 1.402(c)-3(a)(2)(iii)(A) of the QPLO proposed regulations
provides 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 QPLO 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.
Section 1.402(c)-3(a)(2)(iii)(C) of the QPLO 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).
4. Special Rules for QPLO Determinations
Section 1.402(c)-3(a)(2)(iv) of the QPLO proposed regulations
provides several special rules for purposes of determining whether a
plan loan offset amount is a QPLO amount. First, the QPLO 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 QPLO 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.\5\ In the QPLO proposed
regulations, the Treasury Department and the IRS indicated that the
proposed 12-month rule would 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 satisfies
the first requirement in Sec. 1.402(c)-3(a)(2)(iii)(B) to be a QPLO
amount.
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\5\ 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.
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The QPLO proposed regulations proposed to apply the subsequent
final regulations 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 the proposed rules as final
regulations. The preamble to the QPLO proposed regulations also stated
that taxpayers (including a filer of a Form 1099-R) may rely on the
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 the regulations are
published as final regulations in the Federal Register.
The Treasury Department and the IRS received one written comment
relating to the QPLO proposed regulations. No request for a public
hearing was made, and no public hearing was held. After consideration
of the comment, this Treasury decision adopts the QPLO proposed
regulations with one important modification relating to the
applicability date.
Summary of Comments and Explanation of Revisions
The commenter stated that the bright-line 12-month rule in the QPLO
proposed regulations is a helpful approach in determining whether a
plan loan offset amount is a QPLO amount, but expressed concern that
recordkeepers may not currently have procedures to track a terminated
employee's date of severance or the one-year anniversary of that date.
To address this concern, the commenter recommended that the Treasury
Department and the IRS (i) consider an alternative bright-line rule
under which a plan loan offset amount is treated as satisfying the
requirement in Sec. 1.402(c)-3(a)(2)(iv)(B) if the plan loan offset
occurs by the end of the year following the calendar year in which the
employee has a severance from employment, and (ii) delay by one year
the effective date of the final regulations (or, alternatively, provide
for a one-year period of time during which a person responsible for
reporting a QPLO amount on Form 1099-R will not be viewed as improperly
reporting it, provided that a reasonable, good faith effort is made to
determine if a plan loan offset is a QPLO).
With respect to the first recommendation, the Treasury Department
and the IRS have considered the alternative bright-line rule suggested
by the commenter, but have retained in the final regulations the 12-
month rule in Sec. 1.402(c)-3(a)(2)(iv)(B) of the QPLO proposed
regulations. Although the 12-month rule is a bright-line rule that may
assist plan administrators and recordkeepers in satisfying their
reporting obligations, it is also an interpretation of a statutory
requirement that should apply to all taxpayers in the same manner. The
alternative rule recommended by the commenter could result in
significantly different treatment of participants based solely on when
during a calendar year each participant severs from employment. For
example, Taxpayer A, who severs from employment on December 31, 2020,
could experience a plan loan offset during a 366-day period following
the severance and be treated as having a QPLO (and thus be eligible for
the extended rollover rule), whereas Taxpayer B, who severs from
employment one day later, on January 1, 2021, could experience a plan
loan offset during a 729-day period and receive the same treatment.
With respect to the commenter's second recommendation to delay the
effective date of the final regulations, the Treasury Department and
the IRS
[[Page 467]]
agree that additional time to implement Sec. 1.402(c)-3 is
appropriate. Accordingly, the applicability date in these final
regulations is revised from the QPLO proposed regulations, which had
proposed to apply the regulations to plan loan offset amounts treated
as distributed on or after the date of publication of final
regulations. Under the revised applicability date, the final
regulations will apply to plan loan offset amounts, including qualified
plan loan offset amounts, treated as distributed on or after January 1,
2021. Thus, for example, the rules in Sec. 1.402(c)-3 will first apply
to 2021 Form 1099-Rs required to be filed and furnished in 2022 (more
than one year after the date of publication of the final regulations).
This delayed applicability date will give plan administrators and
recordkeepers additional time to program systems and otherwise
establish procedures for obtaining the exact date of severance from
employment of a plan participant and tracking the one-year anniversary
of that date.
The applicability date in these final regulations is also revised
to provide that taxpayers (including a filer of a Form 1099-R) may
apply these regulations with respect to plan loan offset amounts,
including qualified plan loan offset amounts, treated as distributed on
or after August 20, 2020, which is the date of the publication of the
QPLO proposed regulations.
Applicability Date
These regulations apply to plan loan offset amounts, including
qualified plan loan offset amounts, treated as distributed on or after
January 1, 2021. Thus, for example, the rules in Sec. 1.402(c)-3 will
first apply to 2021 Form 1099-Rs required to be filed and furnished in
2022. However, taxpayers (including a filer of a Form 1099-R) may apply
these regulations with respect to plan loan offset amounts, including
qualified plan loan offset amounts, treated as distributed on or after
August 20, 2020.
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 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 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 regulations
reflect the statutory changes to section 402(c) made by section 13613
of TCJA. The regulations reflect the extended rollover period for QPLO
amounts, as amended by TCJA. Specifically, the regulations 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 regulations might affect a
substantial number of individuals, the economic impact of the
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.
Pursuant to section 7805(f), the notice of proposed rulemaking
preceding these regulations was submitted to the Chief Counsel for
Advocacy of the Small Business Administration for comment on their
impact on small business, and no comments were received.
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.
Adoption of Amendments to the Regulations
Accordingly, 26 CFR part 1 is amended as follows:
PART 1--INCOME TAXES
0
1. The authority citation for part 1 continues to read in part as
follows:
Authority: 26 U.S.C. 7805 * * *
0
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)(iii)(A) of this section (including a qualified plan loan offset
amount, a type of plan loan offset amount defined in paragraph
(a)(2)(iii)(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
[[Page 468]]
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 the
examples in this paragraph (a)(2)(v), 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 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
[[Page 469]]
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 ($3,000 relating to the plan loan offset and $7,000 relating to
the cash distribution). 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&A-4(d), the deemed
distribution is not an eligible rollover distribution.
(3) Because Employee B has not severed from employment or
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 section applicable to plan
loan offset amounts, including qualified plan loan offset amounts?
(2) A-2. 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 January 1, 2021.
However, taxpayers (including a filer of a Form 1099-R) may choose to
apply the regulations in this section with respect to plan loan offset
amounts, including qualified plan loan offset amounts, treated as
distributed on or after August 20, 2020.
Sunita Lough,
Deputy Commissioner for Services and Enforcement.
Approved: December 1, 2020.
David J. Kautter,
Assistant Secretary of the Treasury (Tax Policy).
[FR Doc. 2020-27151 Filed 1-5-21; 8:45 am]
BILLING CODE 4830-01-P