How to make extended qualified plan rollovers

In REG-116475-19, the IRS addressed the amendments to Sec. 401(c) by Section 13613 of the law known as the Tax Cuts and Jobs Act (TCJA), P.L. 115-97, which provides an extended rollover period for a qualified plan loan offset.

Sec. 72(p)(1) provides that if, during any tax year, a participant or beneficiary receives (directly or indirectly) any amount as a loan from a qualified employer plan (defined under Sec. 72(p)(4)(A)), that amount will be treated as having been received by the individual as a distribution from the plan. For certain plan loans, Sec. 72(p)(2) provides an exception to the general treatment of loans as distributions. For this exception to apply, the loan generally must satisfy three requirements:

• The loan’s terms must satisfy the limits on loan amounts, under Sec. 72(p)(2)(A) ($50,000);
• The loan must be repayable within five years; and
• The loan must require substantially level amortization over the loan term.

Section 13613 of the TCJA amended Sec. 402(c)(3) to provide an extended rollover deadline for qualified plan loan offset (QPLO) amounts. Any portion of a QPLO amount (up to the entire amount) may be rolled over into an eligible retirement plan by the individual’s tax filing due date (including extensions) for the tax year in which the offset occurs.

Prop. Regs. Sec. 1.402(c)-3 takes into account changes to the QPLO rollover rules. They 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. In addition, the rules in Regs. Sec. 1.401(a)(31)-1, Q&A-16 (which explains the offering of a direct rollover of a plan loan offset amount), and Regs. Sec. 31.3405(c)-1, Q&A-11 (which contains special withholding rules for plan loan offset amounts), that apply to plan loan offset amounts in general also 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.

Consistent with Regs. 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 within the 60-day period set forth in Sec. 402(c)(3)(A).

Consistent with the Sec. 402(c)(3)(C) amendments, 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 tax 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 rollovers) 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 Regs. 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 filing due date.

The proposed regulations also contain definitions of plan loan offset amount, QPLO amount, and qualified employer plan, and special rules for QPLO determinations when a severance from employment has occurred.

The rules will be effective when they are final, but taxpayers may rely on them with respect to plan loan offset amounts, including QPLO amounts, treated as distributed on or after Aug. 20, 2020, until the final regulations are issued.