Rollover of Cash, Deemed Distribution of Loan - what to payout?

[Guest SuzieQNEC]

Participant has a cash balance of $50,000

Participant has an outstanding loan with a current payoff amount of $5,000

Participant would like to rollover the cash only without paying back the loan.

In that case, would the actual distribution be:

50,000 less 20% of loan payoff, or $1,000, for a rollover of $49,000.

The taxable amount would still be $5,000.

[J Simmons]

That sounds right--the $1,000 being the mandatory tax withholding.

[Kevin C]

If all of the cash is rolled over, there is no withholding on the loan offset. If any cash is distributed to the participant, the loan is included in the withholding calculation.

1.72(p)-1 Q&A 15

Q-15: What withholding rules apply to plan loans?

A-15: To the extent that a loan, when made, is a deemed distribution or an account balance is reduced (offset) to repay a loan, the amount includible in income is subject to withholding. If a deemed distribution of a loan or a loan repayment by benefit offset results in income at a date after the date the loan is made, withholding is required only if a transfer of cash or property (excluding employer securities) is made to the participant or beneficiary from the plan at the same time. See §§35.3405-1, f-4, and 31.3405©-1, Q&A-9 and Q&A11, of this chapter for further guidance on withholding rules.

[Guest SuzieQNEC]

Thank you for the reply. Took me a while, but looking it up lead me to the following which does help clear it up. I had no idea:

Q-11: Are there special rules for applying the 20-percent withholding requirement to employer securities and a plan loan offset amount distributed in an eligible rollover distribution?

A-11: Yes. The maximum amount to be withheld on any designated distribution (including any eligible rollover distribution) under section 3405© must not exceed the sum of the cash and the fair market value of property (excluding employer securities) received in the distribution. The amount of the sum is determined without regard to whether any portion of the cash or property is a designated distribution or an eligible rollover distribution. For purposes of this rule, any plan loan offset amount, as defined in §1.402©-2, Q&A-9 of this chapter, is treated in the same manner as employer securities. Thus, although employer securities and plan loan offset amounts must be included in the amount that is multiplied by 20-percent, the total amount required to be withheld for an eligible rollover distribution is limited to the sum of the cash and the fair market value of property received by the distributee, excluding any amount of the distribution that is a plan loan offset amount or that is distributed in the form of employer securities. For example, if the only portion of an eligible rollover distribution that is not paid in a direct rollover consists of employer securities or a plan loan offset amount, withholding is not required. In addition, if a distribution consists solely of employer securities and cash (not in excess of $200) in lieu of fractional shares, no amount is required to be withheld as income tax from the distribution under section 3405 (including section 3405© and this section). For purposes of section 3405 and this section, employer securities means securities of the employer corporation within the meaning of section 402(e)(4)(E)(ii).