Participant Loan - IRA Rollover

[Guest dhoefer]

If a terminated participant with a loan balance wants to roll his/her account balance out of the plan, does the loan have to repaid first OR does it simply become a taxable distribution once the balance is rolled into an IRA or another retirement plan?

[RCK]

It's a taxable distribution unless both the distributing plan will distribute the loan and the receiving plan will accept the loan. I'd say that finding both of those is extremely rare.

The only time that I've seen it was in a merger situation , where as a favor to the acquirer and their new employees we agreed to distribute the loans as rollovers to the acquiring plan. It was an asset deal for a small part of our company, with no plan termination, partial termination, etc.

RCK

[Guest JimD]

Also, review the loan policy to see if the loan is due at termination of employment. If it is, the participant should know he has to repay the loan or it will be considered a taxable distribution. Perhaps you can remind him of the advantages to paying off the loan and also rolling over that amount. If the loan is not due at termination of employment then the participant may be able to continue to make loan payments.

[Guest sritts]

Just a side note - even if the loan is not due and payable upon termination of employment, if the participant rolling over his/her account balance to an IRA, the loan would be a taxable distribution as loans are not permissable in IRAs.

[Guest JimD]

Although unusual I have seen plans that allow the rollover of the cash portion with loan payments continued to be made under the qualified plan.