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Proposed Regulations Issued for Loans from Terminated Employer Plans

Tiffany L. Kuntemeier

August 26, 2020

Treasury and the IRS released proposed regulations on the extended rollover period for Qualified Plan Loan Offset (QPLO). These proposed regulations are related to an amendment enacted under the Tax Cuts and Jobs Act of 2017 (TCJA), and are not related to recent developments on retirement plans under the CARES Act.

These proposed regulations pertain to individuals that have received (directly or indirectly) any amount as a loan from a qualified employer plan, and subsequently whose plan has been terminated, or they have severed from the employer. 

Generally, any outstanding balance on a loan from your qualified employer plan at time of termination or severance will cause a taxable event. These proposed regulations define those loans eligible for a QPLO, allowing an extended period of time (previously 60 days) to roll their plan, and loan, into another qualified plan without income tax consequences.

The proposed regulations define a QPLO as:

  1. The employees loan from a qualified plan deemed distributed by failure to meet repayment terms of a loan from termination of the employer’s plan, or severance from employment of the employee; and
  2. Your loan terms are less than or equal to $50,000, are payable within 5 years, and require a substantially level amortization over the life of the loan. 

The proposed regulations now allow taxpayers with a QPLO to roll the distribution into an eligible retirement plan by the taxpayer’s income tax filing deadline, including extensions, without causing taxable income.  Additionally, if the taxpayer filed their individual return timely, they may be eligible for an automatic six-month extension if they take appropriate rollover action within six months of the original due date. 

Plan administrators will be responsible for reporting the exception properly, but affected individuals should ensure they are corresponding with their plan administrator on the rollovers.  A QPLO amount should be reported on Form 1099-R as a distribution in box 7 using code M (qualified plan loan offset).

The rules will be effective once finalized, but taxpayers may rely on plan loan offset amounts, including QPLO, treated as distribution on, or after August 20, 2020, until the final regulations are issued.

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