Rollover Rules for Qualified Plan Loans

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Ernie Guerriero, CLU®,ChFC®,CEBS,CPCU®,CPC®,CMS,AIF®,RICP®,CPFA

Good news for those employees separating service or having their Plan terminated when they have an outstanding loan.  The Department of Treasury (in Proposed Regulation 2020-16564 to be published August 20) has provided relief for those employees for those situations.  Currently if an individual has an outstanding loan and they either separate service (voluntary or involuntary) or the employer decides to terminate the Plan, the individual would have a distributable event for the amount of the outstanding loan.  The result is tax on that amount and possible pre-mature distribution penalties.

With the Proposed Regulation the Treasury has remedied this by not considering the amount a taxable event if certain conditions are met.  The Plan loan 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.

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.

This amount may now be able to be rolled over to an eligible retirement Plan (another Qualified Plan or an IRA).  While generally there is a 60-day rollover period, there are special rules for the waiver of the 60-day deadline as outlined in the Proposed Regulation.