Carryover 10 year term?

[austin3515]

Participant leaves job A for job B. She has a loan from Plan A payable over 10 years as a primary residence loan. She rolls her account over to Plan B and takes a loan from Plan B on day 1 to make a contribution to an IRA to "repay" the loan, so that there is no taxable distribution. We are not transferring the loan.

Question: Are there any tracing rules that would allow her to continue the 10 year repayment period in the new plan?

[Lou S.]

Unless you are rolling the actual loan which most plans won't allow, there is no rule that I am awre of that would allow you to continue amortization over more than 5 year in the new plan for this situtation.

[12AX7]

What happened to the loan in Plan A if the participant did roll it over to Plan B? Is she still repaying it to Plan A according to its terms? That's what it sounds like, so I'm not sure why anything for the loan in Plan A would change.

I'm also not understanding the part of taking a new loan to make a contribution to an IRA. What does that accomplish?

Sorry if I'm not quite getting all this, but I'm want to make suggestions, if possible.

[ETA Consulting LLC]

I'm also not understanding the part of taking a new loan to make a contribution to an IRA. What does that accomplish?

Sorry if I'm not quite getting all this, but I'm want to make suggestions, if possible.

The loan offset that was not rolled over becomes a taxable event. If cash is not put up within 60 days to roll the amount over, then you'd have that amount as taxable income. So, you borrow the money from the new plan to provide you the cash necessary to rollover the amount in order to avoid taxation.

Good Luck!

[12AX7]

I had forgotten that loan offsets could be rolled over, if not previously deemed distributed. Thanks for clarifying.

[austin3515]

But do I get to use any tracing rules to support that this IS a primary residence loan?

[MoJo]

But do I get to use any tracing rules to support that this IS a primary residence loan?

The simple answer is it isn't the principle residence loan. It's a totally new loan from a new plan. What it is used to pay for is irrelevant, and unless it complies "anew" with the principle residence loan rules, it isn't. Why not roll the loan over to the new plan, and then continue paying on it?

[austin3515]

We've been down that road. Basically it involves lawyers coming up with documentation to transfer and assign the note to the new plan. This is a complication a "hiring" company might be willing to do, but the issue is that the "termianted" company has less incentive to accomodate the person who was either fired or quit.

My opinion is that is only viable in a related party situation, or perhaps a merger/acquisition when the acquired plan is terminating, and they want to move the loans over to the acquiring company;s plan.

[MoJo]

We've been down that road. Basically it involves lawyers coming up with documentation to transfer and assign the note to the new plan. This is a complication a "hiring" company might be willing to do, but the issue is that the "termianted" company has less incentive to accomodate the person who was either fired or quit.

My opinion is that is only viable in a related party situation, or perhaps a merger/acquisition when the acquired plan is terminating, and they want to move the loans over to the acquiring company;s plan.

I agree - that's when it works best (related party transactions) - but I see no other way around your situation. The new loan is a new loan. I don't see how you could essentially characterize the new loan as a "continuation" of the old principle residence loan, when in fact you can't roll over the old loan to the new plan. In other words, why would anyone (i.e. the appropriate regulatory bodies, AND the new plan sponsor - who would have to approve the new loan as a "principle residence loan") believe that you can do it the way proposed, when you can't do it the right way?

If the plan sponsor isn't willing to "accept" a rollover of the loan, why would they take the risk of putting the plan at risk by authorizing a loan to a new hire that purports to be a "principle residence loan" continuation (if there is such a thing) without it complying with the principle residence loan origination requirements?

[austin3515]

I certainly wouldn't give the advice unless someone gave a compelling reason why it would work.

[masteff]

Not that this is the most helpful answer but the reg says something about it...

From 1-72(p)-1

"Q-7: What tracing rules apply in determining whether a loan qualifies as a principal residence plan loan?

A-7: The tracing rules established under section 163(h)(3)(B) apply in determining whether a loan is treated as for the acquisition of a principal residence in order to qualify as a principal residence plan loan."

As to how those tracing rules work, I didn't look too far but did find this thread: http://benefitslink.com/boards/index.php?showtopic=25857

This article http://www.cob.sjsu.edu/nellen_a/225K%20Reading/N88-74.pdf says the tracing rules are in 1.163-8T.

No clue how it applies to the scenario of replacing a debt that was qualified. You'd think the new debt would qualify but the devil may be in the details.