Can a loan be rolled over?

[K-t-F]

I received a call today, a participant has a loan in a plan and is leaving his employer. He wants to roll the loan balance into the new plan at his new employer. Can this be done... if the distributing plan and receiving plan both allow? (I guess it first depends on the distributing plan)

[Bill Presson]

Yes, it can be done. We've done it in a couple of cases, though it's rare.

As you mentioned, both plans need to have language allowing it.

[K-t-F]

I know it's not common, I would allow it. Just need to dot the "i"s and cross the "T"s ..

Thanks

[ETA Consulting LLC]

I agree that I can be done; dot all 'i's and cross all 't's.

Just giving another alternative that "may" work, depending on the circumstances:

Let's suppose the participant has $50,000 in the account plus a $25,000 loan. A direct rollover to a new plan would give him at $50,000 account balance in a new plan and a loan offset of $25,000. Since this is a cashless distributions, it would be exempt from the 20% withholding on the $25,000 taxable amount. The taxable loan offset could be rolled over within 60 days in order to avoid taxation.

The participant could then take a loan from the new plan in the amount of $25,000. In a totally separated transaction, the participant could rollover the $25,000 loan offset (since it would be within 60 days of the distribution).

This is just another planning tool in the event the distributing plan requires a payoff or the new plan does not accept that in-kind loan note.

Good Luck!

[QDROphile]

It can be done only because the IRS says it can be done and the tax risk is the only practical concern. If the IRS is not going to challenge the transaction, no one else should be too concerned that it really cannot be done because the loan legally disappears in the process. A loan can be transferred, but transfers are not favored because they import protected benefits.

I would be a bit more concerned with the alternative that does not hide behind some of the artificialities of the direct rollover rules that the IRS has expressly blessed. Under the alternative approach, the loan offset is a distribution of the loan to the participant (no direct rollover fictions) and the loan is extiguished by merger.

[ETA Consulting LLC]

I would be a bit more concerned with the alternative that does not hide behind some of the artificialities of the direct rollover rules that the IRS has expressly blessed. Under the alternative approach, the loan offset is a distribution of the loan to the participant (no direct rollover fictions) and the loan is extiguished by merger.

So, where is the concern?