Spousal rollover of loan due to death distribution

[FundeK]

Can a spousal beneficiary who is a participant in the same plan as the deceased participant, rollover the participant's loan balance into her own account and assume repayments?

I found this in the ERISA Outline Book:

If the participant has an outstanding loan at the time of death, the participant's death will usually result in an offset of the unpaid balance against the accrued benefit. The participant (or the participant's estate), not the beneficiary, will be liable for any taxes resulting from that offset, because the beneficiary is not a party to the loan agreement. The tax liability might be reported on the participant's final income tax return or on the estate's income tax return. The taxation of loan offsets is addressed in Treas. Reg. §1.72(p)-1 and is discussed in Section IX, Part E., of this chapter. The plan's loan policy might allow the beneficiary to assume the loan obligation and make repayment. A surviving spouse might do this, for example, in order to repay the loan and increase the amount available for rollover by the surviving spouse.

I also found this in the ERISA Outline Book:

If benefits paid to a surviving spouse of the plan participant are made in the form of an eligible rollover distribution, the surviving spouse may elect to rollover such distribution, subject to the same rollover rules that apply to participants.

So, I take this to mean that if the plan allows participants to rollover loans (which I know isn't all that commone) then the spousal beneficiary would be able to rollover the loan and assume payments. Is that correct? Doesn't feel quite right.

Any thoughts would be appreciated!

[QDROphile]

If the infrastructure is in place for rolling out and rolling in, a loan is the same as any other asset and can be rolled.

[Guest Sieve]

I agree. Of course, the trustee has to be willing to accept a loan (here, though, we're dealing with the same trustee). My bigger concern would be whether the loan is assigned, by its terms, upon death--and, I would suspect not--or whether it will be deemed distributed thus negating a loan rollover.

[FundeK]

The loan program indicates that loans will immediately become due and payable upon termination of employment and if not repaid, it will be offset. There is no mention of how to treat loans upon death. Generally, if a participant were to terminate, they would have about 90 days to repay in full before an offset would occur. In this case, I would think that the beneficiary would have the same timeframe to make payment or complete the rollover.

It all makes sense on paper, but something is telling me a beneficiary can't assume the loan liability and make ongoing payments.

What do you mean by the loan being assigned by its terms upon death?

[Guest Sieve]

Sometimes a loan document (i.e., promissory note, supporting documents) will contain language about whether the loan passes to successors or assigns--i.e., whether the borrower can assign the obligation to repay to someone else and the loan documents still be valid (such as on a coporate merger). In other words, in this case, when participant dies, does the promissory note indicate that the lender (Trustee) can look to someone else to repay, or is the loan now due, by its terms, because the borrower can no longer repay. Conceivably, the beneficiary will still be liable on the loan according to the terms of the promissory note--which, in this case, would be a good thing--and then a rollvoer and continued payment can occur. I think it all rides on the note's language.

On the other hand . . . Here, because the Trustee (lender) is the same, I would think at a minimum that the rollover can occur despite any promissory note terms, and then a new loan can be written on the spouse's account to take over the amount due on the participant's loan--a rollover of the loan, and then substitution of a new loan for the old loan (but still limited by the original note's terms). This may be a bit unconventional, but it should be ok.

[Belgarath]

The other thing here is, would anyone care? I'd like to think that the IRS would allow a Trustee to a good deal of leeway on whther they allow this, as long as not expressly forbidden by the terms of the loan/plan. Hard to judge, however - I don't expect this is a high volume situation.

[Kevin C]

Does the surviving spouse have sufficient vested balance in her accounts to borrow enough to pay off the loan?

If the surviving spouse is under 59.5, It may not be in her best interest to rollover the account into her account in the plan. Death benefits are not subject to the 10% early withdrawal penalty. If she rolls it over into the plan and then takes a distribution, it becomes subject to the penalty based on her age.