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Participant Loans / Rollover of Note following Loan Offset


austin3515

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I've been reading up on all of the rules regarding loan offsets and the ability to recontribute those amounts through the extended due date of their tax return following loan offset.  But what has not been made very clear anywhere is how these rules interplay with the ability to rollover the note itself following offset.  So in my example, loan offset was processed by the Plan as of April 30th based on their loan policy.  This employee was included in a group of employees that are "Spinning off" into a new entity. They want the employee to be able to roll the balance over to the new plan.  

Can I still rollover the note even after the loan offset?  That's the big question.  The final regs that came out 1.402(c)(3) seem to make no mention of this whatever.  1.401(a)(31)-16 definitely talks about rolling over notes following offset, but its not clear to me if the new regs extend the date on which that is allowable.  And even if it did, it raises other questions about the 5 year term as follows:

-What if the note is not rolled over for a year?  Presumably the loan would be reamortized as on an approved leave, but I figure someone must have written this down somewhere by now.

-What if the 5 year term is already over?  Presumably the new sponsor should not accept it (or maybe if the loan payments would exceed their paycheck).

Again it just seems like this should be addressed one way or another.  Can anyone point in the direction of what I am missing?

Austin Powers, CPA, QPA, ERPA

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2 hours ago, austin3515 said:

Can I still rollover the note even after the loan offset?

I don't think so.  Offset, by definition, means the loan has been extinguished by reducing the account to pay it off.  "Q&A-9 defines a plan loan offset amount, in general, as a distribution that occurs when, under the terms governing a plan loan, the participant's accrued benefit is reduced (offset) in order to repay the loan."

While a participant may rollover cash in the amount of the loan offset, I don't see how a loan itself may be rolled over once it is offset - it no longer exists.

Having said that, if the paperwork/key entries have not actually been made to literally process the offset, I could possibly see tweaking the loan policy to make the actual offset date June 30 (if that is within the outer bounds of what is allowed) and do a direct rollover of the loan.

Ed Snyder

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I would agree with you, but as a practical matter, these loan rollovers are almost by definition after a loan offset, because generally we're talking about people who have a severance from employment.  I just feel like there should be something straight on point about this...

And that same Q&A references the ablity to repay a loan offset and to transfer the note in the same manner.  IT does not differentiate between those 2 transactions.

Austin Powers, CPA, QPA, ERPA

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If the loan is offset, there is no asset to roll to the new plan.

If the new plan directly accepts the loan note as a rollover to the new plan, that is different.

The QPLO rules allow you extra time to come up with the cash needed to rollover the outstanding balance of the loan, I don't see anything that would lead me to believe you could roll the actual loan note to a new plan by the extended tax filing deadline if it was offset or defaulted and if defaulted instead of offset I don't think you can roll it over at all.

That is if the loan has code 1L, 2L or 7L it is ineligible for rollover.

If it has code 1, 2, or 7 it falls under the 60 day rollover rule.

If it has 1M, 2M or 7M it qualifies for the October 15th (or next business day of weekend or holiday) of the year following offset timeline for paying off as rollover.

If it has code G it was directly rolled from one plan to another.

I think that covers the various scenarios.

 

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So what are the parameters around which a rollover of the note would be allowable?  There must be something written somewhere that says when the loan rollover is allowable.  There is almost always a delay during mergers and acquisitions and spinoffs where the loans are not transferred until after their severance from employment.

Austin Powers, CPA, QPA, ERPA

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The old loan plan has to allow a rollout of a loan (usually after amendment at termination to allow a loan to be rolled out for a business event, like a merger, or sale) and the new plan has to allow a roll-in of loans (also typically for a business event).  The former employee of one plan becomes an employee in the new company immediately (even if not allowed to participate in the new 401(k) plan) and the loan can be transferred almost immediately from trustee to trustee even before employee's first contribution to the new plan.  Once the loan is moved over loan payments can resume via payroll even if not contributing normally.  I think that if the two 401(k) plans will eventually merge then new payroll keeper can withhold and submit loan payments to the old 401(k) which it assumes control of if such old 401(k) is not terminated at closing.  That's a high level view, I admit.

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All of which we already knew, the question is really around what are the parameters that must be adhered to make that work.  I've never seen loans get rolled over "immediately."  You have to until the sale closes before you start giving people election forms.  And then you need to give them some time to think.   At one point does this transaction work and at what point doesn't it work?  Where is that line?  There must be an answer to this question,

Austin Powers, CPA, QPA, ERPA

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well, isn't their choice either default/payoff/rollover.  How much time do they need to think?  Everyone always rolls over if they can.  It's done as fast as the TPA can do it and I've seen it done pretty fast, like in time for next payroll.  I think that the amount of time before a default occurs under the old plan following termination, say 60-days, is sufficient to bring the old loans over and gives you legal leeway on timing.  I'm a plan sponsor (not in payroll), so TPAs typically mostly handle this for me.  

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1 hour ago, Cardscrazy said:

Everyone always rolls over if they can

REally depends on the demographic.  The lower paid people it's a much harder decision.  Yes taxes, but they barely make rent every month so to get rid of that deduction might be quite tempting...

Austin Powers, CPA, QPA, ERPA

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I just heard from a very very reputable soruce that once the loan is offset based on the loan program, the note cannot be rolled over.  Which of course is what Bird and Lou S. said, so props to them... 

Austin Powers, CPA, QPA, ERPA

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If it's really important you probably (depending on other facts and circumstances) can treat whatever action was taken in the software to offset as an error, undo it, say the loan is still outstanding, and then roll it over. Bottom line, if they wanted to do the rollover, they just shouldn't have pushed the offset button, which presumably at some point generates a notice of offset to the employee and a 1099-R. Otherwise, completely agree with everyone else.

Luke Bailey

Senior Counsel

Clark Hill PLC

214-651-4572 (O) | LBailey@clarkhill.com

2600 Dallas Parkway Suite 600

Frisco, TX 75034

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Well the loan should be offset after the expiration of the grace period though irrespective of what is done on the recordkeepering system.  Some recordkeepers won't do that until the sponsor requests it.  Just because the sponsor hasn't requested the offset doesn't mean the note can be rolled to the new Plan...

Austin Powers, CPA, QPA, ERPA

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An offset is a distribution.  If you are within 60 days, you can roll over the offset by taking money personally and rolling it into an IRA.  (I believe the QPLO regs are very clear on this point.)  The QPLO rules extend the time for doing that to the tax return due date if the distribution is a QPLO.

The original question, however, dealt with a spinoff, which makes me wonder about why the offset is happening at all.  If the loan is not offset before the spinoff, the loans move to the new plan as part of the spinoff.  There is no distributable event.  And the recipient plan has an obligation on the merger to respect the contracts with the old plan -including loans.

Hope this helps.

 

Ilene

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Wow, Ilene!!  Thank you so much!

1) If you are within 60 days of the date on which the offset occurred, can you roll over the note.  I was told "no" because as you said after offset, the participant actually has the money and there is no loan (hence the actual distribution).  You can't roll over the note even 1 day after the offset.

2) I should have been more clear.  What really happened is a "division" of employees all up and quit to go work for a new company.  Obviously there is more to it then that so my client is working with this new company to accommodate the rollovers.  So everyone had a severance from employment.  There was not a spin-off per se.

Austin Powers, CPA, QPA, ERPA

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8 hours ago, austin3515 said:

If you are within 60 days of the date on which the offset occurred, can you roll over the note.  I was told "no" because as you said after offset, the participant actually has the money and there is no loan (hence the actual distribution).  You can't roll over the note even 1 day after the offset.

austin3515, what Ilene is referring to is the new law regarding the ability to roll over an offset if you come up with the cash to put in an IRA by the time your tax return is due, not being able to roll over an offset loan into the acquiror's plan.

On 6/8/2021 at 5:16 AM, austin3515 said:

So in my example, loan offset was processed by the Plan as of April 30th based on their loan policy.  This employee was included in a group of employees that are "Spinning off" into a new entity. They want the employee to be able to roll the balance over to the new plan.  

Based on the facts as stated in your original post, the grace period has not run out. Sounds like they have offset based just on the termination of employment. If the parties to the transaction wanted the employees to be able to roll over their loans to the new plan, and just pick up paying them off in the new plan, on their original schedule, which happens all the time in deals, they should have included that as a covenant in their acquisition. But I still think they might be able to go back and fix it if they have not yet issued the 1099-R, since the whole thing at this point is just an imaginary paper shuffle.

Luke Bailey

Senior Counsel

Clark Hill PLC

214-651-4572 (O) | LBailey@clarkhill.com

2600 Dallas Parkway Suite 600

Frisco, TX 75034

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7 hours ago, Luke Bailey said:

austin3515, what Ilene is referring to is the new law regarding the ability to roll over an offset if you come up with the cash to put in an IRA by the time your tax return is due, not being able to roll over an offset loan into the acquiror's plan

I know but I still have the same question (no stone unturned!).

 

7 hours ago, Luke Bailey said:

ased on the facts as stated in your original post, the grace period has not run out. Sounds like they have offset based just on the termination of employment. If the parties to the transaction wanted the employees to be able to roll over their loans to the new plan, and just pick up paying them off in the new plan, on their original schedule, which happens all the time in deals, they should have included that as a covenant in their acquisition. But I still think they might be able to go back and fix it if they have not yet issued the 1099-R, since the whole thing at this point is just an imaginary paper shuffle.

This loan program indicated that the grace period ended 90 days after a missed payment.  My understanding again is that the loan program controls (not the "maximum available" grace period).

I am considering the option of amending the grace period today if it would help, but I'm not sure if the bell can be unrung in that regard...  

Austin Powers, CPA, QPA, ERPA

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8 hours ago, austin3515 said:

I am considering the option of amending the grace period today if it would help, but I'm not sure if the bell can be unrung in that regard...

I would argue that you can probably unring it under the circumstances, but obviously don't have all the facts. The loan policy is what the plan sponsor makes it, within legal guidelines, so it seems to me a retroactive change would probably work.

Luke Bailey

Senior Counsel

Clark Hill PLC

214-651-4572 (O) | LBailey@clarkhill.com

2600 Dallas Parkway Suite 600

Frisco, TX 75034

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9 hours ago, austin3515 said:

I am considering the option of amending the grace period today if it would help, but I'm not sure if the bell can be unrung in that regard...  

That's what I suggested way back at the beginning.

On 6/8/2021 at 9:00 AM, Bird said:

Having said that, if the paperwork/key entries have not actually been made to literally process the offset, I could possibly see tweaking the loan policy to make the actual offset date June 30 (if that is within the outer bounds of what is allowed) and do a direct rollover of the loan.

 

Ed Snyder

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