Another pesky loan question - Can you rollover an outstanding loan?

[Guest Powers]

I just received a question from a client who maintains a Profit Sharing Plan with the 401(k) Option. They wanted to know if an outstanding loan can be rolled over to another qualified plan along with the vested benefit once an employee is terminated.

My initial though was that it would depend on if the receiving plan accepts such a rollover. But the more that I think on it and look through this client's Individually Designed Plan Document and loan policy, I am thinking that thay would also have to amend their loan policy to accomplish this. So now I have really confused myself.

Has anyone come across a situation like this? Is there any specific loan guidance on something like this or do practicioners prepare amendments to get the desired results? Any thoughts that you may have would be greatly appreciated.

[Guest ckolodziej]

If the participant is willing to pay back the loan in full he can then rollover the entire amount to an IRA and have it be non-taxable. Otherwise, you must offset his balance by the loan amount and the difference can be rolled to an IRA. The loan amount must be reported as a cash payment that was taxable but with no taxes withheld but he has actually already received that amount. It must not be paid to him twice.

That participant is not entitiled to that money because he or she already received a cash distribution when he took out the loan.

Am I answering the right question? It sounds as if you are thinking he is entitiled to the full amount in some form. That is not the case since he already took a "distribution" in the form of a loan. He is due the difference only.

Let me know if I did not answer your question.

Thanks.

[Guest Chamelnix]

You can rollover an outstanding loan to another qualified plan as long as both plans allow it. See 1.401(a)(31)-1, Q&A 16 and PLR 9617046.

[KJohnson]

I agree with Chamelnix that is clearly allowed. However, if you have a loan offset immeditately upon termination then there is no loan "note" to rollover and I would agree with ckolodziej that then you could only rollover the loan offset amount (assuming the Participant could find the $$).

Therefore I think Powers is on the right track. You have to look at the distributing plan to see if it allows the distribution of the loan note in a rollover and to make sure that you don't have an offset automtatically upon termination of employment. You would have to look at the receiving plan to see if they accept particpant notes as rollovers.