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Qualified Loan Offsets


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Reading a previous question, I just want to make sure I understand this. I thought that if a participant had an outstanding loan and they obtained a qualified event like the plan allows for early distribution, that the participant would be able to offset the remaining outstanding balance of the loan due to qualifying event. So if John was 58 when he took a loan for $10,000, after a year and half, he decides that he wants the remaining loan balance (say it's $7400 now) to be offset because he's now 59 1/2, I thought that was permissible. Am I wrong?

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I don't think I would call it an offset - I'd call it a distribution of the loan balance, and yes, I think it can be done.  If the plan administrator and/or recordkeeper balk, then he could take a distribution of cash equal to the loan balance and then pay off the loan and get to the same place.

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6 minutes ago, JOH said:

So would the tax code simple be "7" or "M7"?

It would be 7.

For 7M to apply you would need a triggering event of termination of employment or Plan termination. Either of which follows your fact pattern.

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8 hours ago, Bird said:

I don't think I would call it an offset - I'd call it a distribution of the loan balance, and yes, I think it can be done.  If the plan administrator and/or recordkeeper balk, then he could take a distribution of cash equal to the loan balance and then pay off the loan and get to the same place.

Yes and no. The loan offset does not require withholding if it's the only distribution. If he took a distribution to pay back the loan, he would need to gross it up for the 20% tax withholding.

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