1099-R forms for loan

[pmacduff]

Participant rolls his balance out of one plan and into another plan. He has a current outstanding loan in compliance with the loan provisions of the Plan.

Plan he is rolling into allows for loans and accepts his outstanding loan balance and will takeover the loan administration.

Does distributing plan prepare a 1099-R form for the loan "rollover" and use code "G"?

Any thoughts appreciated.

[masteff]

Special Tax Notice says "If your employment ends and you have an outstanding loan from your Plan, your employer may reduce (or "offset") your balance in the Plan by the amount of the loan you have not repaid. The amount of your loan offset is treated as a distribution to you at the time of the offset and will be taxed, if otherwise taxable, unless you roll over an amount equal to the amount of your loan offset to another employer plan or an IRA within 60 days of the date of the offset."

This matches my understanding that the distributing plan treats a loan offset simply as a distribution (code 1 or 2). The participant then has, as stated above, 60-days to make a rollover contribution equal to the amount of the loan offset. (Can't rollover the loan per se, have to put equal amount of cash into the receiving plan and then take a loan from it, in order to have that net effect.)

If the loan was in default, then you'd use code L and the loan would not be rollover eligible.

[JanetM]

If you are transferring the loan asset and the cash in rollover to new plan I would use the G. 100% of account rolled over so why does it matter what the actual asset was that transferred to new plan. You use G for in kind stock distribution to IRA. How is loan assets any different?

[Bird]

Yeah, I would just use G for the whole amount, including the loan.

[pmacduff]

Thanks everyone...Bird & Janet - I agree and am going to use the "G" for the total account balance.

However, Masteff got me thinking, so I was reading through the Special Tax Notice language and came to the conclusion that the "heart of the matter" would be whether or not the loan balance is considered an "eligible rollover" or not. Nothing I have found verifies or contradicts that one way or another; so I think I will go ahead and use the "G" Code.

[masteff]

Okay... given the disenting opinions above, I went and found the better answer. Reg 1.401(a)(31)-1 Q&A-16

Q-16: Must a direct rollover option be provided for an eligible

rollover distribution that is in the form of a plan loan offset amount?

A-16: A plan will not fail to satisfy section 401(a)(31) merely

because the plan does not permit a distributee to elect a direct

rollover of an eligible rollover distribution in the form of a plan loan

offset amount. Section 1.402©-2(b), 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. A plan administrator is permitted

to allow a direct rollover of a participant note for a plan loan to a

qualified trust described in section 401(a) or a qualified annuity plan

described in section 403(a). See Sec. 1.402©-2, Q&A-9 for examples

illustrating the rules for plan loan offset amounts that are set forth

in this Q&A-16. See Sec. 31.3405©-1, Q&A-11 of this chapter for

guidance concerning special withholding rules that apply to a

distribution in the form of a plan loan offset amount.

The way I read this is that you'd need to read the Plan document section on direct rollovers and make sure it doesn't limit the form of direct rollover (eg, cash only). This would then determine whether you can do the 1099-R as a direct rollover or if it's a distribution w/ subsequent rollover.

[pmacduff]

Thank you!