Is there such a thing as a "loan rollover"?

[FundeK]

Is there such a thing as a "loan rollover"? OR is it really a "loan transfer"? Is one "term" better than the other?

Why would a plan allow a loan rollover/transfer other than in instances of plan merger or transfer?

[Harwood]

Although administratively a hassle, some plan sponsor allow loans to be rolled into their plans.

It helps the participant who otherwise would have to pay off their old loan at their old plan or have a unwelcome taxable event for the amount of their loan balance.

[QDROphile]

Technically, the IRS should not have given authority for loan rollovers because the distribution will extingusih the loan in the process. That does not happen with loan transfers. But the IRS forgot basic principles and did give the authority, and so now we have loan rollovers if the plan terms provide for them. A practical development, but intellectually unsatisfying.

[mbozek]

Q I dont see a substantive distinction between a rollover of a loan and a transfer of the loan between a plan trustee to another trustee since the loan is a plan asset. Reg 1.401(a)(31)-1 Q 16 recognizes that.

[QDROphile]

The regulation is simply an example of the IRS saying that a rollover of a loan is OK. And so it is OK.

What the IRS misses is the distinction between a rollover and a transfer. You cannnot have a rollover without a distribution. The invention of the direct rollover erased most of the practical differences between a transfer and a direct rollover. However, since it is a rollover, it still involves a distribution. If there is a distribution, the loan is extinguished. The IRS overlooked that basic principle. When you give a note to the debtor, the debt is extinguished. I will not respond to the observation that the particpant never holds the note in hand in a direct rollover, among other reasons because it is not necessarily so. Legally, a distribution gives the assets to the particpant. The direct rollover is an artifical procedure that relates mostly to withholding.

I don't quarrel with the practicality of the IRS position. The position is consistent with the almost complete erosion of the differences between a transfer and a direct rollover. I object to the intellectual cheating that occurs within the layers of artificial (although practical) rules that disregard legal principles. It would have been better to call direct rollovers something other than a rollover. The confusion between transfers and rollovers has only become worse because of the blurring around the edges when direct rollovers are thrown into the mix.

Or perhaps we just recognize that this whole area is entirely artificial and exists by virtue of tax rules. The principles, when consistent with the rules, are just rationalizations. Who would argue that plan loans are really loans as we know them outside of plans? They are artificial, too. So why not roll over artifical loans under an artificial rule and not get worked up about the fact that the arrangements do not fit the principles that apply in the outside world?

[E as in ERISA]

What is the old plan negotiated the promissory note to the new plan (assuming it was a negotiable interest -- which most probably aren't today -- since the notes aren't signed).